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Notes LAW OF TAXATION
Notes LAW OF TAXATION
Notes LAW OF TAXATION
UNIT I
GENERAL
CONCEPT OF TAX - NATURE AND CHARACTERISTICS OF DIFFERENT
TYPES OF TAXES - DIRECT AND INDIRECT TAXES - DISTINCTION BETWEEN
TAX, FEES & CESS - TAX EVASION, TAX PLANNING & TAX AVOIDANCE -
RETROSPECTIVE TAXATION - FEDERAL BASE OF TAXING POWER - POWER
OF TAXATION UNDER THE CONSTITUTION, IMMUNITY OF STATE
AGENCIES/INSTRUMENTALITIES - FUNDAMENTAL RIGHTS AND THE
POWER OF TAXATION - COMMERCE CLAUSE, INTER STATE COMMERCE
AND TAXATION, SCOPE OF TAXING POWERS OF PARLIAMENT,
DELEGATION OF TAXING POWER TO STATE LEGISLATURES AND LOCAL
BODIES.
A1. INTRODUCTION
Before one can embark on a study of the law of income-tax, it is absolutely vital to
understand some of the expressions found under the Income-tax Act, 1961. The purpose of
this Chapter is to enable the students to comprehend basic expressions. Therefore, all such
basic terms are explained and suitable illustrations are provided to define their meaning
and scope.
1. OBJECTIVES
After going through this lesson you should be able to understand:
Importance and History of Income Tax in India
Meaning of Person and Assessee
Definitions of various Terms used in Income Tax
What is regarded as ‘Income’ under the Income-tax Act
What is ‘Gross Total Income’
Concept of Assessment Year and Previous Year
How to charge tax on income
Income-tax rates
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IMPORATANCE
The Taxation Structure of the country can play a very important role in the working of our
economy. Some time back the emphasis was on higher rates of Tax and more incentives.
But recently, the emphasis has shifted to Decrease in rates of taxes and withdrawal of
incentives. While designing the Taxation structure it has to be seen that it is in conformity
with our economic and social objectives. It should not impair the incentives to personal
savings and investment flow and on the other hand it should not result into decrease in
revenue for the State.
In our present day economy structure Income Tax plays a vital role as a source of Revenue
and a measure of removal economic disparity. Our Taxation structure provides for Two
types of Taxes --- DIRECT and INDIRECT ; Income Tax , Wealth Tax and Gift Tax are Direct
Taxes whereas Sales Tax and Excise Duties are Indirect Taxes.
HISTORY
The Income Tax was introduced in India for the first time in 1860 by British rulers following
the mutiny of 1857. The period between 1860 and 1886 was a period of experiments in the
context of Income Tax. This period ended in 1886 when first Income Tax Act came into
existence. The pattern laid down in it for levying of Tax continues to operate even to-day
though in some changed form. In 1918, another Act- Income Tax Act, 1918 was passed but
it was short lived and was replaced by Income Tax Act, 1922 and it remained in existence
and operation till 31st. March, 1961.
PRESENT ACT
On the recommendation of Law Commission & Direct Taxes Enquiry Committee and in
consultation with Law Ministry a Bill was framed. This Bill was referred to a select
committee and finally passed in Sept. 1961. This Act came into force from 1st.April 1962 in
whole of the country. Income Tax Act, 1961 is a comprehensive Act and consists of 298
Sections. Sub-Sections running into thousands Schedules, Rules, Sub-Rules, etc. and is
supported by other Acts and Rules. This Act has been amended by several amending Acts
since 1961. The Annual Finance Bills presented to Parliament along with Budget make far-
reaching amendments in this Act every year.
The word “Person” is a very wide term and embraces in itself the following :
These are seven categories of person chargeable to tax under the Act. The aforesaid
definition is inclusive and not exhaustive . Therefore, any person, not falling in the above-
mentioned seven categories, may still fall in the four corners of the term “Person” and
accordingly may be liable to tax under Sec.4.
Example:
Determine the status of the following :
1. Delhi University
2. Microsoft Ltd.
3. Delhi Municipal Corporation
4. Swayam Education Pvt. Ltd.
5. Axsis Bank Limited.
6. ABC Group Housing Co-operative Society.
7. DC & Co., firm of Mr. Dust and Mr. Clean
8. A joint family of Mr.Dirty, Mrs. Dirty and their sons Mr. Dust and Mr. Clean
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9. X and Y who are legal heirs of Z ( Z died in 1995 and X and Y carry on his business
without entering into partnership).
Solutions :
Example :
Income of Mr. You ( age : 30 years) is Rs. 1,45,000 for the assessment year 2018-19.
he does not file his return of income because his income is not more than the
amount of exempted slab. Income-Tax Department does not take any action against
him. He is not an “assessee” because no tax or any other sum is due from him.
Income of Mr. Me ( age: 35 years) is Rs.1,60,000 for the assessment year 2018-19. He
does not file his return of income. Since he is supposed to file his return of income (
income being more than exempted slab of Rs.1,50,000) . he is an “Assessee”.
Income of Mr. S ( age : 50 years) is Rs. 70,000 for the assessment year 2018-19. He
files his return of income ( even if his taxable income is less than Rs.1,50,000 ).
Assessment order is passed by the Assessing Office without any adjustment. Mr.S is
an “ Assessee”.
Income of Mr. Ram ( age : 25 years) is less than Rs.1,50,000 for the assessment year
2009-10. He files his return of income to claim Refund of Tax deducted by XYZ Ltd.
on interest paid to him. B is an “Assessee”.
Income of MR. Clean ( age : 30 years) is less than Rs.1,50,000 for the assessment year
1018-19. He does not file his return of income. During 2018-19 , he has paid salary of
Rs.2,40,000 to an employee. Though he is supposed to deduct TDS (Tax deducted at
Source ), yet due to ignorance of law, no tax deducted by him. In this case, Mr. Clean
is an “assessee” as he has failed to deduct tax at source. This rule is applicable even if
his own taxable income is below Rs.1,50,000.
It’s nowhere mentioned that “Income” refers to only monetary return. It includes value of
Benefits and Perquisites.
The term “Income” includes not only what is received by using the property but also the
amount saved by using it himself. Any thing which is convertible into income can be
regarded as source of accrual of income.
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“ Income includes “ :
Example :
ABC Trust is created for public charitable purposes. On Dec, 15, 2008 it receives a sum of
Rs.2 Lakh as voluntary contribution from a business house . Rs. 2 Lakh would be included in
the income of the Trust.
The value of any Perquisites or Profit in lieu of Salary taxable in the hand of
employee.
Example:
Mr. You is employed by XYZ Ltd. Apart from Salary , he has been provided a Rent-Free
House by the employer . the value of perquisites is respect of the Rent-Free House is
taxable as “Income” in the hands of Mr. You..
Any Special Allowance or Benefit : All type of special allowance are given/allow to
the assessee to meet the expenses exclusively, wholly and necessarily for the duties
he performed for the office or employment is treated as “Income”.
Example:
Mr. You is employed by XYZ Ltd. He gets Rs.5,000 per month as conveyance allowance
other than Salary .Rs. 5,000 per month is treated as “ Income”.
Example:
Mr. You owns a House Property. On its transfer, he generates a Capital Profit of Rs.1,20,000.
it is treated as “Income” even if it is Capital Profit.
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Any winning from Lotteries (it included winning from prizes awarded) , Winning from
Crossword Puzzles, winning from Races including Horse Race, winning from Card
Games and other similar Games, winning from gambling or betting.
Example:
Mr. You wins a sum of Rs. 50,000 from gambling. Rs.50,000 is treated as “ Income” of Mr.
You.
Any sum received by the assessee on account of his employer’s contributions to any
Provident Fund, Superannuation Fund or any other Fund for the welfare of such
employees in the business.
Amount exceeding Rs.50,000 by way of Gift.
FEATURES OF “INCOME’
The following features of income can help a person to understand the concept of income.
1. Definite Source : Income has been compared with a fruit of a tree or a crop from the
field. Fruit comes from a tree and crop from fields. Thus the source of income is
definite in both cases. The existence of a source for income is somewhat essential to
bring a receipt under the charge of tax.
2. Income must come from Outside : No one can earn income from himself. There can
be no income from transaction between head office and branch office. Contributions
made by members for the mutual benefit and found surplus cannot be termed as
income of such group.
3. Tainted Income : Income earned legally or illegally remains income and it will be
taxed according to the provisions of the Act. Assessment of illegal income of a
person does not grant him immunity from the applicability of the provisions of other
Act. Any expenditure incurred to earn such illegal income is allowed to be deducted
out of such income only.
4. Temporary or Permanent : Whether the income is permanent or temporary, it is
immaterial from the tax point of view.
5. Voluntary Receipt : The receipts which do not arise from the exercise of a profession
or business or do not amount to remuneration and are made for reasons purely of
personal nature are not included in the scope of total income.
6. Dispute regarding the Title : In case a person is receiving some income but his title
to such receipts is disputed, it will not free him from tax liability. The receipt of such
income has to pay tax.
7. Income in Money or Money’s worth : The income may be in Cash or in kind. It is
taxable in both cases.
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TAX TREATMENT OF “INCOME’
For the purposes of treatment of income for tax purposes it can be divided into 3
categories :
A. Taxable Income : These incomes form part of total income and are fully taxable. These
are treated u/s 14 to 69 of the Act. These are Salaries, Rent, Business Profits, Professional
Gain, Capital Gain, Interest, Dividend, Winning from Lotteries, Races etc.
B. Exempted Incomes : These incomes do not from part of total income either fully or
partially . hence, No Tax is payable on such incomes. These incomes are given u/s 10(1) to
10(32) of the Act.
C. Rebateable ( Tax Free) Incomes : These incomes form part of total income and are
fully taxable. Tax is calculated on total income out of which a Rebate of Tax at average Rate
is allowed . The Rebateable incomes given u/s 86 of the Act are :
After aggregating income under various heads, losses are adjusted and the resultant figure
is called “ Gross Total Income” [ GTI ]
From Gross Total Income , Deductions u/s 80 are allowed. The resultant figure is called
“Total Income “ on which Rates of Taxes are applied
The Assessment Year is the Financial Year of the Govt. of India during which income a
person relating to the relevant previous year is assessed to tax. Every person who is liable
to pay tax under this Act, files Return of Income by prescribed dates. These Returns are
processed by the Income Tax Department Officials and Officers. This processing is called
Assessment. Under this Income Returned by the assessee is checked and verified.
Tax is calculated and compared with the amount paid and assessment order is issued. The
year in which whole of this process is under taken is called Assessment Year.
Example-
Assessment year 2018-19 which will commence on April 1, 2018, will end on March 31,
2019.
Income of Previous Year of an assessee is taxed during the next following Assessment Year
at the rates prescribed by the relevant Finance Act
It is the Financial Year preceding the Assessment Year. As such for the assessment year
2008-2009, the Previous Year for continuing business is 2007-2008 i.e. 1-4-2007 to 31-3-
2008.
The Previous Year in case of newly started business shall be the period between
commencement of business and 31st March next following . e.g. in case of a newly started
business commencing its operations on Diwali 2007, the Previous Year in relation to
Assessment Year 2008-2009. shall be the period between Diwali 2007 to 31 March 2008.
In such case the Previous Year shall be the period between the day on which such source
comes existence and 31st March next following.
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Sl.
Income Section Previous Year
No.
1. Cash Credit [68] Financial Year in which found to be entered.
2. Unexplained Investment [69] Financial Year preceding the Assessment Year
3. Unexplained Bullion, Cash, Financial Year in which found in the possession
[69A]
Jewelley of the assessee.
4. Partly explained Investment [69B] Financial Year in which Investment was made.
5. Unexplained Expenditure [69C] Financial Year in which expenditure was incurred.
6. Payment of Hundi, Money in
[69D] Financial Year in which such payment was made.
Cash
10. When Income Of Previous Year Is Not Taxable In The Immediately Following
Assessment Year .
The rule that the income of the previous year is taxable as the income of the immediately
following assessment year has certain exceptions. These are:
2. Income of persons leaving India either permanently or for a long period of time [ Section
174] ;
In case I.T.O. has the reasons to believe that an individual will leave India with having no
intention of retuning to India during the current assessment year, the total income of such
individual will be taxable in the current assessment year for the period between the expiry of
last previous year and till the date of his departure.
3. Income of a person trying to transfer his assets with a view to avoiding payment of tax. [
Section 175]
These exceptions have been incorporated in order to ensure smooth collection of income tax
from the aforesaid taxpayers who may not be traceable if tax assessment procedure is
postponed till the commencement of the normal assessment
On the basis of the aforesaid discussion, it can be said that a financial year plays a double
role—it is a Previous Year as well as an Assessment Year.
11. What Are Different Heads Of Income According To Income Tax Act. ?
There are 5 different Income heads. The Income under each head will be charged to Income
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Tax. Thus the tax will be computed on the basis of total income.
Income Tax is charged on 5 different heads. Aggregate of taxable income under each head of
income is known as Gross Total Income and so
Taxable Income = Gross Total Income - Allowance Deductions.
Deduction of Expenditure :
In computing income under various heads, deduction is allowed towards expenditure
incurred in relation to earning the income. However, no deduction shall be allowed in respect
of expenditure incurred in relation to incomes exempt from tax.
Where the Gross Total Income of the Assesses includes Short-Term Capital Gains from
transfer of equity shares / units of an equity oriented mutual fund subject to Securities
Transaction Tax or any Long-Term Capital Gains, then no deduction shall be allowed against
such Capital Gains.
On this Taxable Income, Income Tax will be calculated as per the applicable rates.
Any Rent or Revenue derived from Land which is situated in India and is used for
agricultural purposes. [Sec. 2(1A)(a)]
Any income derived from such land :
o Use for Agricultural purposes ; or
o Used for agricultural operations means- irrigating and harvesting , sowing,
weeding, digging, cutting etc. It involves employment of some human skill,
labour and energy to get some income from land. ; or
According to Sec. 2(1)(a) , if the following 3 conditions are satisfied, income derived from
Land can be termed as “Agricultural Income”.
As a result, interest on arrears of land revenue, dividend paid by a company out of its
profits which included agricultural income also and salary paid to a manager for managing
agricultural farms are not agricultural incomes because in all these cases land is not the
effective and immediate source of income.
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situated outside India or is from any non-agricultural land, it will not be exempted u/s
10(1). It is taxable income under the head “Income from other Sources”.
What is the Tax Treatment of Income which is partially Agricultural and partially
from Business [ Rules 7, 7A, 7B and 8]
For disintegrating a composite business income which is partly agriculture and partly non-
agricultural, the following rules are applicable –
Coffee Business
40% 60%
Rubber Business
40% 65%
Example :
Mr. X owns a Flour Mill and some agricultural Land. During the year 2018-2019 he has
shown profit of Rs.25 lacs from the Business of Flour Mill. On scrutiny of accounts it was
found that he has used 5,000 quintals of wheat produced in his own Farms and cost of this
wheat has not been debited to P & L account. The market price of the wheat during the
season was Rs.400 per quintal.. Find out his Agricultural and Business income.
Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as
Central Board of Direct Taxes (CBDT) constituted under the Central Board of Revenue
Act, 1963.
The major tax enactment in India is the Income Tax Act, 1961 passed by the
Parliament, which imposes a tax on the income of persons.
This Act imposes a tax on income under the following five heads:
I. Income from salaries
II. Income from business and profession
III. Income in the form of capital gains
IV. Income from house property
V. Income from other sources
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V. Hindu Undivided Family (HUF)
VI. Body of Individuals (BOI)
VII. Local authority
VIII. Artificial Judicial person not falling in any of the preceding categories
For FY 2017-18, the slab rate for income tax up to Rs. 5 lakh has has been brought down to 5% from 10%. The
tax rate for companies with per annual turnover of up to Rs 50 crore has been brought down to 25% from 30%.
Income Tax Slab for Individual Tax Payers & HUF (Less Than 60 Years Old
Both Men and Women)
Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1 crore.
Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.
*Income tax exemption limit for FY 2017-18 is up to Rs. 2,50,000 for individual & HUF other than those covered
in Part(II) or (III)
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Income Tax Slab for Senior Citizens (60 Years Old Or More but Less than 80
Years Old Both Men & Women)
Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh upto Rs.1 crore.
Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.
*Income tax exemption limit for FY 2017-1 is up to Rs. 3,00,000 other than those covered in Part(I) or (III)
Income Tax Slab for Senior Citizens(80 Years Old Or More Both Men &
Women)
Income up to Rs 5,00,000* 5%
Surcharge: 15% of income tax, where total income exceeds Rs.1 crore.
*Income tax exemption limit for FY 2017-18 is up to Rs. 5,00,000 other than those covered in Part(I) or (II)
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What are the Benefits of Taxes?
The government can work on important infrastructures and developmental plans for the nation from the
income generated through taxes.
These also encourage citizens to create sufficient investments and savings and use several financial
investments to reduce the taxable income and thus lessening the tax amount to be paid.
Paying taxes includes that you must file for tax returns. On doing so it gets easier to apply for home loan
or credits and easing your financial journey.
Different types of taxes carry unique penalties if not paid out. These penalties can be monetary fines to
imprisonment according to the crime's severity. In few cases, you may have to pay the owed tax with a lump
sum as fine that is determined by the government officials. Thus, it is recommended that everyone must pay the
taxes in time and be aware of the taxes you are liable to pay.
Direct and indirect taxes are different in a way these are implemented. You may have to directly pay some taxes
such as corporate tax, income tax etc., while some are indirectly paid such as service tax, sales tax, value added
tax etc. There are few other taxes that the Central Government has brought into effect and levied on both
indirect and direct taxes such as Krishi Kalyan Cess tax, Swachh Bharat Cess tax, infrastructure cess tax etc.
Taxes which are paid directly by individuals and organisations to the government of India come
under Direct Tax. Taxes which are paid under Direct Tax include, Personal Income Tax, Capital
Gains Tax, Securities Transaction Tax, Perquisite Tax, Corporate Income Tax, Marginal Tax, Rate
Tax on Agricultural.
2. Indirect Tax
Service Tax which is incurred indirectly by the government of India are provided by firms and
servicing companies in lieu of monetary benefit. The Central Government via the Finance Act, 1994
governs the taxability of services provided by an individual or a company under Section 66B.
Service tax is charged at the rate of 15% currently. The taxability arises once the value of services
exceeds Rs. 10 lakhs during the financial year.
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Taxes imposed by Central Government
1. Income tax
Besides agricultural income, Income Tax is mainly collected by the central government. It is
imposed on individuals or entities (taxpayers) that varies with respective income or profits (taxable
income).
2. Custom Duty
Collected by Central Board of Excise and Customs (CBEC) under the Department of Revenue, the
Ministry of Finance, Government of India, Custom Duty is levied on goods imported in India as
well as exported from India.
The Constitutional provisions have given to Union the right to legislate and collect duties on
imports and exports.
3. Excise Duty
Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are
meant for home consumption. The taxable event is 'manufacture' and the liability of central excise
duty arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a
manufacturer, who passes its incidence on to the customers.
The term "excisable goods" means the goods which are specified in the First Schedule and the
Second Schedule to the Central Excise Tariff Act, 1985 , as being subject to a duty of excise and
includes salt.
In India, Excise Duty is applied to these goods namely,
Petroleum crude
High-speed diesel
Motor spirit (commonly known as petrol)
Natural gas
Aviation turbine fuel
Tobacco and tobacco products.
4. Corporation Tax
Company whether Indian or foreign is liable to taxation, under the Income Tax Act,1961.
Corporation tax is a tax which is levied on the incomes of registered companies and corporations.
Companies in India, whether public or private are governed by the Companies Act, 1956. The
registrar of companies and the company law board administers the provisions of the Act.
The government divides it between two sub-categories:
Domestic company [Section 2(22A)]
An Indian company (i.e. a company formed and registered under the Companies Act,1956) or any
other company which, in respect of its income liable to tax, under the Income Tax Act, would have
to pay the tax.
A domestic company may be a public company or a private company.
Foreign company [Section 2(23A)]
A company whose control and management are situated wholly outside India, and which has not
made the prescribed arrangements for declaration and payment of dividends within India.
State Tax
1. Electricity Duty
Although the taxes are collected by the central government, Electricity Tax may vary from state to
state.
2. Value Added Tax (VAT)
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One of the important components of tax reforms initiated since liberalization is the introduction of
Value Added Tax (VAT). The VAT is a multi-point destination-based system of taxation, with tax
being levied on value addition at each stage of the transaction in the production/ distribution chain.
The VAT is basically a State subject, derived from Entry 54 of the State List, for which the States
are sovereign in taking decisions. The State Governments, through Taxation Departments, are
carrying out the responsibility of levying and collecting the VAT in the respective States. While the
Central Government is playing the role of a facilitator for the successful implementation of VAT.
The Ministry of Finance is the main agency for levying and implementing VAT, both at the Centre
and the State level.
The Department of Revenue, under the Ministry of Finance, exercises control in respect of matters
relating to all the direct and indirect taxes, through two statutory Boards, namely, the Central Board
of Direct Taxes (CBDT) and the Central Board of Customs and Central Excise (CBEC).
The term 'value addition' implies the increase in the value of goods and services at each stage of
production or transfer of goods and services. The VAT is a tax on the final consumption of goods or
services and is ultimately borne by the consumer.
It is a multi-stage tax with the provision to allow 'Input tax credit (ITC)' on tax at an earlier stage,
which can be appropriated against the VAT liability on the subsequent sale.
This input tax credit in relation to any period means setting off the amount of input tax by a
registered dealer against the amount of his output tax. It is given for all manufacturers and traders
for the purchase of inputs/supplies meant for sale, irrespective of when these will be utilised/ sold.
The VAT liability of the dealer/ manufacturer is calculated by deducting input tax credit from tax
collected on sales during the payment period (say, a month).
3. Sales Tax
It is the tax which is paid to the government for the sales of products and services. Sales tax is of
different types depending upon the sale of product from manufacturer to wholesaler or retailer to the
customer.
4. Entertainment Tax
In India, a tax is imposed on things related to entertainment such as for movie tickets, festivals,
commercial shows, amusement parks etc. and the revenue goes to the state government.
5. Toll Road Tax
Also called as turnpike or tollway, toll tax is a fee paid by the passerby. The toll is collected to
recover the cost of road construction, maintenance etc.
1. DIRECT TAX
The Central Board of Direct Taxes is one of the bodies that takes care of direct taxes and helps on with its
support, duties, governing etc. Some of these are mentioned below:
Following the IT Act of 1961, the government rules the income tax in India. It comes from the sources such as
owning of property or house, business, salaries, gains from investment etc.
The expenditure tax was introduced in 1987 and concerns the expenses you incur when availing services at a
restaurant or hotel. It does not apply on Jammu and Kashmir but rest of the India.
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Securities Transaction Tax
When you trade in stock market or securities, you gain some substantial amount of money which becomes a
source of income, and is levied with securities transaction tax. The same is added to the share price, so when
you sell or buy shares, you pay this tax every time.
The capitals gains tax is implied on sizeable earning from sale of property or investments. There are two types:
short term capital gains and long term capital gains. The interest earned on investment is taxed.
This tax came into effect in 1974. It states the amount payable on interest earned from specific situations. There
was an amendment, which eliminated requirement of interest tax on interests earned later to March 2000.
Perquisite Tax
The privileges that employers bestow on employees are taxed as well. These come under the perquisite tax.
The perks can extend to compensations such as housing, cars, phone and fuel bills etc. If these facilities are
used for official purpose, then the costs incurred may be exempted from such taxes.
Corporate Tax
This tax is paid by firms for the revenue these earn. There are specific tax slabs in this section and the payment
of tax is according to these slabs. Types are: minimum alternative tax, fringe benefit tax, and dividend
distribution tax.
As per the budget 2015, the Wealth Tax stands abolished, but it was enacted in 1951. It was meant to pose
taxation as per the net wealth of the company, individual or a Hindu Unified Family.
Since 1958, the Gift Tax came into being, which taxed people on receiving gifts worth a value and shelling an
amount up to 30% of the gift's expense. However, this tax was done away with in 1998. Now if someone other
than the exempted entities gives gift to you, exceeding INR 50,000 then this gift amount will be taxed.
2. INDIRECT TAX
Some of the taxes are levied on the facilities and services you enjoy and these come to be taxed by the
government. Here are few of the important indirect taxes.
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Value Added Tax
VAT is a commercial tax but not levied on commodities with zero rates such as essential drugs and food items or
those that come under exports. However, value added tax comes in play for supply chain where it is paid by
dealers, distributors and manufacturers.
Sales Tax
This tax was levied on sale of product and came under both central and state legislation. The limitation of the
sale tax is that it can be taken once for particular product. Thus if the product is resold, this tax won't apply.
Service Tax
The service tax as the name implies is a tax added on services provided in India. The last ratio percentage for it
was 14 and it is not applied on goods but firms that offer services. Such amount is reflected in the bill to
customers
The most talked about tax is the Good and Services Tax, which has superimposed several of the indirect taxes,
which now stands defunct. GST is consumption based tax and applies on value added services, goods at
several stages of consumption in supply chain. Merchants can pay the GST rate applicable and claim it through
the tax credit system.
Excise Duty
This tax is imposed on things manufactured in India and called as Central Value Added Tax or CENVAT. It is
collected from the manufacturer of goods by the government. No excisable goods that bear any payable duty are
allowed to move without the payment of duty to the destination where these are manufactured or produced.
On making a purchase that has to be imported in India from another country, you may have to pay custom duty
and Octroi tax. The Octroi is for ensuring that goods from across the borders and coming into the country are
taxed properly.
3. OTHER TAXES
The other taxes are referred to as cess and are levied by the government with intention of generating funds for
specific purposes as decided by the Finance Minister.
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Starting from November 2015, the Swachh Bharat Cess is applicable on taxable services of India and is
accounted at 0.5% over and above service tax of 14%. This cess is not implemented on services which are
completely exempt from service tax or services covered under negative services list. This is collected by the
Consolidate Fund of India and utilize in promoting and funding government campaigns related to Swachh Bharat
efforts.
Applicable since June 2016, the Krishi Kalyan Cess is levied on all services of India in order to extend welfare to
farmers and improve the agricultural facilities of the nation. The rate for this tax is 0.5% and charged over and
above the Swachh Bharat Cess and service tax.
Professional Tax
Employment or professional tax is a tax levied by the state governments. As per the norms, individuals practising
a profession such as lawyer, doctor, company secretary, chartered accounted or earning etc must pay this tax.
Not every state levy professional tax, whose rate also differs as per the state government's discretion.
Property Tax
Real estate tax or property tax is levied by the local municipal bodies of all cities. These are levied to make funds
for maintaining basic civic services. The owners of commercial and residential properties are subject to the
Municipal tax.
Entertainment Tax
The entertainment tax is levied by the government on television series, amusement, feature films and
recreational parlours. Such tax is taken into account as the business entity's total collection of earnings from film
festival earnings, commercial shows and audience participation.
The mentioned taxes supplement property tax and are incurred at specific such as charges of stamp duty,
property registration or transfer of ownership to another person or entity.
Infrastructure Cess
The infrastructure cess came into effect on 1st June 2016. A cess of 1% is eligible on motor vehicles driven on
LPG/CNG/Petrol. The vehicles accounted for such cess must be 4 meters or less in length and 1200cc or lower
engine capacity. 2.5% tax has to be paid for diesel motor vehicles that do not exceed the mentioned length and
contain engines with capacities lower than 1500cc. 4% cess is applicable on vehicle's overall cost for big SUVs
and sedans.
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Education Cess/Surcharge
The Education Cess helps to cover the cost by government for sponsoring educational programs. The tax is
collected independently and applicable on all Indian corporations, citizens and other people residing in the
country. Currently, the cess amount is 2% of individual's income.
Entry Tax
Under entry tax, select states in India such as Madhya Pradesh, Assam, Gujarat, Uttarakhand, and Delhi
account for tax payable on items that enter this state via e-commerce establishments.
This form of tax is paid for the infrastructure developed by the government for roads and bridges. The amount of
such tax is rather negligible and utilized for maintenance of particular roadway projects.
DISTINCTION BETWEEN
TAX, FEES & CESS
Tax is the amount payable by each person for doing an activity and paid by the purchaser/earning
income (receiver) and paid by him/her and goes to government.
Income tax is charged for earning income above a threshold limit and paid to central government.
GST is charged when goods/services are sold and recovered from a person purchasing goods/services
and paid to central government for allocation amongst central and state government.
Amount of taxes are shared between center and state in proportion to predecided allocation amongst
them.
Fee is charged for giving a license, certificate, permission and is charged from a person desirous of
taking License, certificate and/or permission and retained by the department giving such permission.
Ther is no share of center and/or state from the fee collected.
Cess is charged generally by Central government for any specific purpose and payable to central
government only. There is no share of state in Cess collected.
Tax is the compulssory pecuniary payment made by the citizens to the state without any quid pro quo.
The amount collected by the state is used for providing common amenities to the society at large and
also used to meet its administrative expenses. Eg.Income tax, Sales tax,Property tax etc
Cess is also a tax levied by the government from its subjects to meet specified expenses or for specific
purposes. Eg. Education cess , petroleum cess, cess on Income tax etc
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Fees means the charge or rate levied by the government from people who use such services provided
by the government. Eg. Toll on roads and bridges, registration fee, court fee etc
A cess imposed by the central government is a tax on tax, levied by the government for a specific
purpose.
Generally, cess is expected to be levied till the time the government gets enough money for the
earmarked purpose and not for any other purposes.In simple words, a cess tax is an earmarked
tax.
If the purpose for which the cess is created is fulfilled, it should be eliminated.
Article 270 of the Constitution describes a cess.
Cess are named after the identified purpose; the purpose itself must be certain and for public good.
At present, the main cess are: education cess, road cess or (fuel cess), infrastructure cess, clean energy
cess, krishi kalyan cess and swachh bharat cess.
On the other hand, ‘Surcharge’ is an additional charge or tax levied on an existing tax imposed for the
purposes of the Union.
Unlike a cess, which is meant to raise revenue for a temporary need, surcharge is usually permanent
in nature.
Surcharges, in India, are used to make the taxation system more ‘progressive’.
They are used to ensure that the rich contribute more to the tax kitty than the poor.
An example of surcharge is one where individuals earning more than ₹1,00,00,000 annually are
required to pay an extra sum amounting to 15% on their income tax.
Following are the difference between the usual taxes, surcharge and cess.
The usual taxes go to the consolidated fund of India and can be spent for any purposes.
Surcharge also go to the consolidated fund of India and can be spent for any purposes.
Cess go to Consolidated Fund of India but can be spent only for the specific purposes for
which they have been created.
The proceeds collected from a surcharge and a cess levied by the union need not be shared with the
State governments and are thus at the exclusive disposal of the union government.
The use of usual taxes, cess and surcharges requires appropriation bill to be passed in the
Parliament.
Hence, it can be seen that the Constitution makes a distinction between a cess and a surcharge and the
two cannot be used interchangeably.
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TAX EVASION, TAX PLANNING & TAX AVOIDANCE
Tax evasion and Tax Avoidance can leave your finances jeopardize for a long time
Tax planning is an umbrella term which not only covers the various aspects of tax-
filling but focuses deeper on the need of reducing one’s tax liability
Tax Evasion: Tax Evasion is an illegal way to minimize tax liability through fraudulent
techniques like deliberate under-statement of taxable income or inflating expenses. It is an
unlawful attempt to reduce one’s tax burden. Tax Evasion is done with a motive of showing
fewer profits in order to avoid tax burden. It involves illegal practices such as making false
statements, hiding relevant documents, not maintaining complete records of the transactions,
concealment of income, overstatement of tax credit or presenting personal expenses as
business expenses. Tax evasion is a crime for which the assesse could be punished under the
law.
Tax Planning: Tax planning is process of analyzing one’s financial situation in the most
efficient manner. Through tax planning one can reduce one’s tax liability. It involves
planning one’s income in a legal manner to avail various exemptions and deductions. Under
Section 80C, one can avail tax deduction if specific investments are made for a specific
period up to a limit of Rs 1, 50,000. The most popular ways of saving tax are investing in
PPF accounts, National Saving Certificate, Fixed Deposit, Mutual Funds and Provident
Funds. Tax planning involves applying various advantageous provisions which are legal and
entitles the assesse to avail the benefit of deductions, credits, concessions, rebates and
exemptions. Or we can say that Tax planning is an art in which there is a logical planning of
one’s financial affairs in such a manner that benefits the assesse with all the eligible
provisions of the taxation law. Tax planning is an honest approach of applying the provisions
which comes within the framework of taxation law.
Tax Avoidance: Tax avoidance is an act of using legal methods to minimize tax liability. In
other words, it is an act of using tax regime in a single territory for one’s personal benefits to
decrease one’s tax burden. Although Tax avoidance is a legal method, it is not advisable as it
could be used for one’s own advantage to reduce the amount of tax that is payable. Tax
avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by
finding new ways to avoid the payment of taxes that are within the limits of the law. Tax
avoidance can be done by adjusting the accounts in such a manner that there will be no
violation of tax rules. Tax avoidance is lawful but in some cases it could come in the
category of crime.
Features and differences between Tax evasion, Tax avoidance and Tax Planning:
1. Nature: Tax planning and Tax avoidance is legal whereas Tax evasion is illegal
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2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and
objectionable.
3. Motive: Tax planning is the method of saving tax .However tax avoidance is dodging of
tax. Tax evasion is an act of concealing tax.
4. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion leads to
penalty or imprisonment.
5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the script
of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax
planning is done to reduce the liability of tax by applying the provision and moral of law.
6. Permissible: Tax planning and Tax avoidance are permissible whereas Tax evasion is not
permissible.
INTRODUCTION
The main goal of every taxpayer is to minimize his Tax Liability. To achieve this objective
taxpayer may resort to following Three Methods :
o Tax Planning
o Tax Avoidance
o Tax Evasion
It is well said that “Taxpayer is not expected to arrange his affairs in a such manner to pay
maximum tax “ . So, the assessee shall arrange the affairs in a manner to reduce tax. But the
question what method he opts for ? Tax Planning, Tax Avoidance, Tax Evasion !
Let us see its meaning and their difference.
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Tax Planning involves planning in order to avail all exemptions, deductions and rebates
provided in Act. The Income Tax law itself provides for various methods for Tax Planning,
Generally it is provided under exemptions u/s 10, deductions u/s 80C to 80U and rebates
and relief’s. Some of the provisions are enumerated below :
For availing benefits, one should resort to bonafide means by complying with the
provisions of law in letter and in spirit.
Where a person buys a machinery instead of hiring it, he is availing the benefit of
depreciation. If is his exclusive right either to buy or lease it . In the same manner to choice
the form of organization, capital structure, buy or make products are the assesse’s
exclusive right. One may look for various tax incentives in the above said transactions
provided in this Act, for reduction of tax liability. All this transaction involves tax planning.
The Planning should be done before the accrual of income. Any planning done after
the accrual income is known as Application of Income an it may lead to a conclusion
of that there is a fraud.
Tax Planning should be resorted at the source of income.
The Choice of an organization, i.e. Taxable Entity. Business may be done through a
Proprietorship concern or Firm or through a Company.
The choice of location of business , undertaking, or division also play a very
important role.
Residential Status of a person. Therefore, a person should arranged his stay in India
such a way that he is treated as NR in India.
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Choice to Buy or Lease the Assets. Where the assets are bought, depreciation is
allowed and when asset is leased, lease rental is allowed as deduction.
Capital Structure decision also plays a major role. Mixture of debt and equity fund
should be balanced, to maximize the return on capital and minimize the tax liability.
Interest on debt is allowed as deduction whereas dividend on equity fund is not
allowed as deduction
1. Short Term Tax Planning : Short range Tax Planning means the planning
thought of and executed at the end of the income year to reduce taxable income in a legal
way.
Example : Suppose , at the end of the income year, an assessee finds his taxes have been too
high in comparison with last year and he intends to reduce it. Now, he may do that, to a
great extent by making proper arrangements to get the maximum tax rebate u/s 88. Such
plan does not involve any long term commitment, yet it results in substantial savings in tax.
2. Long Term Tax Planning : Long range tax planning means a plan chaled out at
the beginning or the income year to be followed around the year. This type of planning
does not help immediately as in the case of short range planning but is likely to help in
the long run ;
e.g. If an assessee transferred shares held by him to his minor son or spouse, though the
income from such transferred shares will be clubbed with his income u/s 64, yet is the income
is invested by the son or spouse, then the income from such investment will be treaded as
income of the son or spouse. Moreover, if the company issue any bonus shards for the
shares transferred , that will also be treated as income in the hands of the son or spouse.
3. Permissive Tax Planning : Permissive Tax Planning means making plans which
are permissible under different provisions of the law, such as planning of earning income
covered by Sec.10, specially by Sec. 10(1) , Planning of taking advantage of different
incentives and deductions, planning for availing different tax concessions etc.
Tax Avoidance
It is an act of dodging tax without breaking the Law. It means when a taxpayer arranges his
financial activities in such a manner that although it is within the four corner of tax law but
takes advantages of loopholes which exists in the Tax Law for reduction of tax a liability. In
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other words though he has complied the letter of law but not the sprit behind the law.
Following transactions are held as Tax Avoidance which are :
1. Where tax law is complied with by using colorable devices which means that use o
dubious method or a method which is unfair for reduction of tax liability.
2. Where the fact of the case is presented in a false manner.
3. Where the sprit behind the law is avoided.
4. There is a malafide intention.
It means that method adopted for reducing tax liability should be within the framework of
law. If it is not within the framework of law, it amounts to tax avoidance and not Tax
planning.
Tax Evasion
Any illegal method which leads to reduction of tax liability is known as Tax Evasion. The Tax
Evasion is resorted to by applying following dishonest means :
E.g. Claiming depreciation where no asset exist in the Business or claiming depreciation
on the assets which is used for residential purposes. It Is basically a fraudulent method of
reduction in tax liability.
RETROSPECTIVE TAXATION
One of the most controversial economic issues in the last five years was the tax dispute
between Vodafone and the tax department.
The case originated after the revenue’s (tax department) notice to Vodafone that the
company has to pay a capital gains tax of nearly Rs 11000 crores from its purchase of
Hutchison Essar Telecom Company from Hutch.
The entire dispute centered on the question that whether an indirect transfer of property
located in India can be taxed under the relevant section 9(1)(i) of the Income-tax Act. The
section instructs imposition of capital gains tax when the capital assets are transferred
directly from one company to another.
Indirect transfer means when the shares of a company is transferred, the underlying asset is
also transferred to the buyer.
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At the final stage of the dispute, the Supreme Court verdict that tax department doesn’t have
the right to tax the deal. This is because the relevant income tax Act (Section 9 (i) (i))
doesn’t instruct tax authorities when capital asset (machinery building etc) lying in India is
transferred indirectly by transferring the shares by foreign companies abroad. Both Vodafone
and Hutch were foreign companies and they made deal in another foreign company which
held 67% of shares of Hutchison Essar India Limited. Hence Vodafone need not pay tax for
the said deal.
After the setback in the Vodafone case, government has amended Section 9 (i) (i)). The new
amendment clarified that when a share transaction take place between two nonresident
entities that results indirect transfer of assets lying in India, such an income will be taxed in
India.
But the most important point about the 2012 amendment of the income tax act was that it
was amended with effect from 1962. This means the amendment has retrospective effect.
A retrospective tax law is one that takes effect from a date before it is passed. Here, the law
imposing tax on indirect transfer of assets in India was enacted in 2012, but the tax will be
applicable to all transaction that took place from 1962 onwards (Income tax rule was passed
in 1962).
The controversy was that whether it is fair to impose a tax with retrospective effect. A
company’s business decisions are based upon the tax situation that exists today. It is very
difficult to organize its activities today based on a future law that will be made applicable
from today.
An ideal tax system should be predictable certain and stable. Hence retrospective
implemetation is a bad move.
Later, the government has asked Sri Parthasarathi Shome to make recommendations about
the retrospective implementation.
The Shome Panel had recommended that any taxation involving indirect transfer of assets
located in India should be prospective and not retrospective.
The Committee concluded that retrospective application of tax law should occur in
exceptional or rarest of rare cases, and with particular objectives. Moreover, retrospective
application of a tax law should occur only after exhaustive and transparent consultations with
stakeholders who would be affected.
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The controversy surfaced again recently when the tax department issued notice to Vodafone.
Vodafone is not ready to pay taxes after the SC verdict. The company has indicated that it
will approach Netherlands government (its registered office) for invoking the India-
Netherlands Bilateral Investment Protection Agreement.
In the next budget, it is expected that the government may discontinue retrospective clause of
the amendment.
Before every financial year begins, Ministry of Finance presents its finance budget which covers
aspects such as how the previous year has gone and what are the proposals/plans for the next
financial year in terms of revenue allocation to various sectors, changes relating to tax law
provisions (both direct and indirect tax) etc. Such tax law changes generally termed as
‘amendments’ are proposed keeping in mind on-going developments, welfare of taxpayers,
loopholes which could not be plugged in earlier and also representations received by various
stakeholders. For eg: extension of profit linked deduction to few more years, introduction of new
exemption, introduction of new tax levy such as equalisation levy etc. Once these proposals are
accepted by both houses of parliament and receives the assent of Hon’ble President, it becomes
an enacted law.
These amendments can be of two kinds based on the specified date of its application;
a) Prospective amendment and
b) Retrospective amendment.
While prospective amendments are comparatively easy to handle and accepted atleast based on
its nature of application, retrospective amendments create lot of confusion and complexity and are
not easily acceptable. Therefore, date of application of law plays a major role to determine its
impact on taxpayers and be prepared and plan their next move. Hence, in this article we have
discussed retrospective amendment and covered the following topics:
2. Retrospective amendment
Dictionary meaning of the word ‘retrospective’ is ‘looking back over the past’, ‘relating to or
thinking about the past’, ‘looking backwards’ etc. In a similar fashion, with respect to law or statute,
it simply means ‘taking effect from a date in the past’.
Therefore, if there is an amendment to the law and it is applicable from a specified date in the past
but not future, it is termed as a retrospective amendment. For example, Extension of exemption
under Section 10(23C) to an income received by any person on behalf of the Chief Minister’s
Relief Fund, was made retrospectively from 1 April 1998 by Finance Act 2017.
3. Retrospective tax
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Retrospective tax is nothing but a combination of two words “retrospective” and “tax” where
“retrospective” means taking effect from a date in the past and “tax” refers to a new or additional
levy of tax on a specified transaction. Hence, retrospective tax means creating an additional
charge or levy of tax by way of an amendment from specified date in the past. For eg:
Levy of tax on indirect transfers by Finance Act 2012 retrospectively from 1961; Introduction of
Section 14A for disallowance of expenditure related to exempt income in the year 2001 with
retrospective effect from April 1962.
While retrospective amendment may or may not have an additional tax levy or charge,
retrospective tax will have an additional tax levy.
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6. Validity of retrospective
amendment/retrospective tax
As already mentioned retrospective tax is not so easily welcomed by taxpayers as it creates an
additional levy on the transaction which is already concluded when the provisions of law were
different. Taxpayer would have planned his finance and tax based on the law as it existed at that
time and disturbing the same by way of unjust and unwarranted retrospective amendments is
unreasonable. However, retrospective amendment / retrospective tax by itself does not become
unreasonable or invalid. Validity/reasonableness of retrospective amendment/tax depends on
facts and circumstance of each case and need to be analysed on the merits of amendment in light
of facts and circumstance under which such amendment is made.
To sum up, any retrospective amendment which benefits taxpayers is welcome and non-beneficial
retrospective amendment / retrospective tax which is only clarificatory in nature is acceptable.
However, any unreasonable and unexpected new tax levy on a transaction which is closed in light
of the then existing law would be unfair and cause disruption and validity need to be analysed.
Taxes in India are levied by the Central Government and the state governments. Some minor
taxes are also levied by the local authorities such as the Municipality.
The authority to levy a tax is derived from the Constitution of India which allocates the
power to levy various taxes between the Central and the State. An important restriction on
this power is Article 265 of the Constitution which states that "No tax shall be levied or
collected except by the authority of law". Therefore, each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the State Legislature.
The federal character of public finance in India has its origin as far as the seventies of the last
century. Although at that time the country had a unitary form of government, some division
of functions and financial powers between the Center and the state was found
administratively desirable.
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[i] Ever since then the arrangements have been revised and improved from time to time.
Fiscal federalism entails the division of responsibilities in respect of taxation and public
expenditure among the different layers of the government, namely the Center, the states and
the local bodies. Fiscal federalism helps governmental organization to realize cost efficiency
by economies of scale in providing public services, which correspond most closely to the
preference of the people.
[ii] From the point of view of economy, it creates a unified common market, which promotes
greater economic activity.
[iii] The Seventh Schedule (Article 246) delineates ‘the subject matter of laws made by the
Parliament and by the Legislatures of the states’ and indicates the Union List (List I), states
List (List II) and the Concurrent List (List III).
[iv] List I invests the union with all functions of national importance such as defence,
external affairs, communications, constitution, organization of the Supreme Court and the
high courts, elections etc, List II invests the states with a number of important functions
touching on the life and welfare of the people such as public order, police, local government,
public health, agriculture, land etc. List III is a concurrent List, which includes
administration of justice, economic and social planning, trade and commerce, etc.
According to Article 246, Seventh Schedule, Parliament has exclusive powers to make laws
regarding matters enumerated in List I, notwithstanding the provisions of the other clauses of
this Article. On the other hand, the Legislature of any state has exclusive power to make laws
for the state regarding any of the matters enumerated in List II, subject to other clauses.
[v] With regard to List III, both the Parliament and a State Legislature can make laws but the
law listed in I or III, vests with the Union. Thus, the Union has supremacy over a wide range
of the legislative field.
Accordingly there are both mandatory and enabling provisions in the Constitution for
facilitating a wide-ranging transfer of resources, arranged in a systematic manner, through:
1) Levy of duties by the Center but collected and retained by the States;
2) Taxes and duties levied and collected by the Center but assigned in whole to the states;
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7) Grants of loans for any public purpose.
The authority to levy a tax is derived from the Constitution of India which allocates the
power to levy various taxes between the Central and the State. An important restriction on
this power is Article 265 of the Constitution which states that "No tax shall be levied or
collected except by the authority of law". Therefore, each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the State Legislature.
List - I entailing the areas on which only the parliament is competent to make laws,
List - II entailing the areas on which only the state legislature can make laws, and
List - III listing the areas on which both the Parliament and the State Legislature can make laws upon
concurrently.
Separate heads of taxation are no head of taxation in the Concurrent List (Union and the States have no
concurrent power of taxation). The list of thirteen Union heads of taxation and the list of nineteen State heads
are given below:
SL.
Taxes as per Union List
No.
Excise Duty: Duties of excise on the following goods manufactured or produced in India namely
84 (a)Petroleum crude (b)high speed diesel (c)motor spirit (commonly known as petrol) (d)natural
gas (e) aviation turbine fuel and (f)Tobacco and tobacco products
85 Corporation Tax
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Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on
86
capital of companies
89 Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight.
90 Taxes other than stamp duties on transactions in stock exchanges and futures markets
Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in
92A
the course of inter-State trade or commerce
92B Taxes on the consignment of goods in the course of inter-State trade or commerce
97 All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian Constitution
State governments
SL.
Taxes as per State List
No.
Land revenue, including the assessment and collection of revenue, the maintenance of land records,
45
survey for revenue purposes and records of rights, and alienation of revenues etc.
36
50 Taxes on mineral rights.
Duties of excise for following goods manufactured or produced within the State (i) alcoholic liquors for
51
human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics.
Taxes on sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol),Natural
54 gas aviation turbine fuel and alcohol liquor for human consumption but not including sale in the course of
inter state or commerce or sale in the source of international trade or commerce such goods.
59 Tolls.
61 Capitation taxes.
63 Stamp duty
IMMUNITY OF STATE
AGENCIES/INSTRUMENTALITIES
According to Tax Law, the Doctrine of Immunity of Instrumentalities means, the State and
Central (Federal) Governments have immunity from paying taxes imposed by the other.
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Article 289(2) of the Constitution of India relaxes the Doctrine saying that the Union can tax
a State by passing a bill in the Parliament.
India has adopted a restricted concept of sovereign immunity. Pursuant to the Code of Civil
Procedure of India, foreign states and their organs and instrumentalities can be sued with the
prior written consent of the Indian government. However, such consent may not be required
where the matter is governed by a special law (for, eg, the Carriage by Air Act 1972,
Consumer Protection Act 1986) or where the legal proceedings are not in the nature of a suit,
such as an industrial dispute under the Industrial Disputes Act 1947. In its 2011 judgment in
Ethiopian Airlines v Ganesh Narain Saboo (Ethiopian Airlines), the Supreme Court of India
reiterated the consistent view in India that the doctrine of sovereign immunity in India was
not absolute, and that foreign states do not have immunity from judicial proceedings in cases
involving their commercial and trading activities and contractual obligations undertaken by
them in India.
Legal basis
What is the legal basis for the doctrine of sovereign immunity in your state?
The legislative recognition of the doctrine of sovereign immunity in India can be found in
the following provisions and statutes:
section 86 of the Code of Civil Procedure 1908 (CPC), which provides that no suit
may be instituted against foreign states in India, except with the prior written consent
of the government; and
the Diplomatic Relations (Vienna Convention) Act 1972, which incorporates certain
specified immunities available to diplomatic missions and their members in India
pursuant to the Vienna Convention on Diplomatic Relations, 1961. A few articles of
the Convention, including articles 29, 30, 31, 32, 37, 38 and 39, have been given the
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force of law in India by extending the scope of sovereign immunity to diplomatic
agents, their family, members of staff and servants.
It is noteworthy that in Mirza Ali Akbar Kasani v United Arab Republic & Anr, a five-judge
bench of the Supreme Court held that section 86(1) CPC modifies the international doctrine
of sovereign immunity to a certain extent, and when a suit is instituted against a foreign state
with the consent of the government, it is not open for a foreign state to rely upon the doctrine
of sovereign immunity under international law.
Jurisdictional immunity
Domestic law
Describe domestic law governing the scope of jurisdictional immunity.
The domestic law governing jurisdictional immunity of foreign states is prescribed in section
86(1) of the CPC. Section 86(1) provides that ‘no foreign state may be sued in any court
otherwise competent to try the suit except with the consent of the central government
[government] certified in writing by a Secretary to that Government’; implying thereby that
there is immunity in the favour of foreign states from the jurisdiction of Indian courts, which
survives unless the government consents to a suit against a foreign state. However, the
proviso to section 86(1) exempts suits by tenants of immovable properties held by foreign
states from the requirement of obtaining the government’s prior consent.
Further, section 86(2) provides that the government shall not consent to a suit against a
foreign state unless certain conditions exist. Per section 86(2), the government may only
consent to a suit against a foreign state where the foreign state:
has instituted a suit in a court against the person desiring to sue the foreign state;
by itself or another, trades within the local limits of the jurisdiction of the court;
is in possession of immovable property situated within those limits and is to be sued
with reference to such property or for money charged thereon; or
has expressly or impliedly waived the privilege accorded to it.
The property of Centre is exempted from all taxes imposed by a state or any authority within
a state like municipalities, district boards, panchayats and so on. But, the Parliament is
empowered to remove this ban. The word ‘property’ includes lands, buildings, chattels,
shares, debts, everything that has a money value, and every kind of property movable or
immovable and tangible or intangible. Further, the property may be used for sovereign (like
armed forces) or commercial purposes. The corporations or the companies created by the
Central government are not immune from state taxation or local taxation. The reason is that a
corporation or a company is a separate legal entity.
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Exemption of State Property or Income from Central Taxation
The property and income of a state is exempted from Central taxation. Such income may be
derived from sovereign functions or commercial functions. But the Centre can tax the
commercial operations of a state if Parliament so provides. However, the Parliament can
declare any particular trade or business as incidental to the ordinary functions of the
government and it would then not be taxable. We note here that the property and income of
local authorities situated within a state are not exempted from the Central taxation. Similarly,
the property or income of corporations and companies owned by a state can be taxed by the
Centre. The Supreme Court, in an advisory opinion24 (1963), held that the immunity granted
to a state in respect of Central taxation does not extend to the duties of customs or duties of
excise. In other words, the Centre can impose customs duty on goods imported or exported
by a state, or an excise duty on goods produced or manufactured by a state.
A government cannot exist without raising and spending money. Parliament controls public
finance which includes granting of money to the administration for expenses on public
services, imposition of taxes and authorization of loans. This is a very important function of
Parliament. Through this means Parliament exercise control over the executive because
whenever Parliament discusses financial matters, government’s broad policies are invariably
brought into focus. The Indian Constitution devises an elaborate machinery for securing
parliamentary control over finances which is based on the following four principles.
The first principle regulates the constitutional relation between the Government and
Parliament in matters of finance. The executive cannot raise money by taxation, borrowing
or otherwise, or spend money, without the authority of Parliament. The second principle
regulates the relation between the two Houses of Parliament in financial matters. The powers
of raising money by tax or loan and authorizing expenditure belongs exclusively to the
popular House, viz., Lok Sabha. Rajya Sabha merely assents to it. It cannot revise, alter or
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initiate a grant. In financial matters, Rajya Sabha does not have co-ordinate authority with
Lok-Sabha and Rajya Sabha plays only a subsidiary role in this respect. The third principle
imposes a restriction on the power of Parliament to authorize expenditure. Parliament cannot
vote money for any purpose whatsoever except on demand by ministers. The fourth principle
imposes a similar restriction on the power of Parliament to impose taxation. Parliament
cannot impose any tax except upon the recommendation of the Executive.
The entries in the legislative lists are divided into two groups- one relating to the power to
tax and the other relating to the power of general legislation relating to specified subjects.
Taxation is considered as a distinct matter for purposes of legislative competence. Hence, the
power to tax cannot be deducted from a general legislative Entry as an ancillary power.
Thus, the power to legislate on inter-state trade and commerce under Entry 42 of List I does
not include a power to impose tax on sales in the course of such trade and commerce.
There is no Entry as to tax, in the Concurrent List; it only contains an Entry relating to levy
fees in respect of matters specified in List III other than court-fees.
In order to determine whether a tax was within the legislative competence of the legislature
which imposed it, it is necessary to determine the nature of the tax, whether it is a tax on
income, property, business or the like so that the Entry under which the legislative power has
been assumed could be ascertained.
The primary guide for this is what is known as the ‘charging section. The identification of
the subject-matter of a tax is only to be found in the charging section, the section which
creates the liability to pay the tax as distinguished from the mode of assessment or
machinery by which it is assessed.
Generally speaking, all taxation is imposed on persons, but the nature and amount of liability
is determined either by individual units, as in the case of a poll-tax, or in respect of the tax
payers’ interest in property or in respect of transactions of activities of the tax payers.
Apart from the limitation by the division of the taxing power between the Union and State
Legislature by the relevant Entries in the legislative Lists, the taxing power of either
Legislature is particularly subject to the following limitations imposed by particular
provisions of our Constitution:
(1) It must not contravene Art.13.
(2) It must not deny equal protection of the laws, must not be discriminatory or arbitrary
.(Art.14)
41
(3) It must not constitute an unreasonable restriction upon the right to business.(19(1)(g))
(4) No tax shall be levied the proceeds of which are specially appropriated in payment of
expenses for the promotion or maintenance of any particular religion or religious
denomination (Art.27).
(5) A State Legislature or any authority within the State cannot tax the property of the
Union.(Art.285)
(6) The Union cannot tax the property and income of a State (Art.289).
(7) The power of a State to levy tax on sale or purchase of goods is subject to Art.286.
(8) Save in so far as Parliament may, by law, otherwise provide, a State shall not tax the
consumption or sale of electricity in the cases specified in Art.287
The central sales tax is an indirect tax on consumers. Though CST is a central levy, however
it is administered by the concerned State in which the sale originates. The seller or a dealer
of goods in a State has to collect State Sales Tax on the sale of goods within the State as well
as central Sales Tax on sales that takes place in the course interstate trade or commerce.
The objects of the Central Sales Tax Act, 1956 are given in the preamble of the Act which
says that it is an Act to formulate principles for determining when a sale or purchase of
goods takes place in the course of inter-state trade or commerce or outside the a State or in
the course of import into or export from India, to provide for the levy, collection and
distribution of taxes on sales of goods in the course of inter-State trade or commerce and to
declare certain goods to be of special importance in inter-State trade or commerce and
specify the restrictions and conditions to which State laws imposing taxes on the sale or
purchase of such goods of special importance shall be subject.
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The scope and content of Article 301 depends on the interpretations of three expressions
used therein, viz., 'trade, commerce and intercourse', 'free' and 'throughout the territory of
India'.
The framers of the Indian constitution, instead of leaving the idea of 'intercourse' to be
implied by the process of judicial pronouncements, expressly incorporated the same in
Article 301. The words trade and commerce have been broadly interpreted. In most of the
cases, the accent has been on the movement aspect. For example, in the Atiabari Tea Co. v.
State of Assam case, the court emphasized : "whatever else it (Art.301) may or may not
include, it certainly includes movement of trade which is of the very essence of all trade and
is its integral part," and, further, that "primarily it is the movement part of the trade" which
Article 301 has in its mind, that "the movement or the transport of the trade must be free,"
and that "it is the free movement or the transport of goods from one part of the country to the
other that is intended to be saved."
Again, in State of Madras v. Nataraja Mudaliar, the court stated that "all restrictions which
directly and immediately affect the movement of trade are declared by Article 301 to be
ineffective." Nevertheless cases are not wanting where movement has not been involved but
other aspects of trade and commerce have been involved. The view now appears to be fairly
settled that the sweep of the concept 'trade, commerce and intercourse' is very wide and that
the word trade alone, even in its narrow sense, would include all activities in relation to
buying and selling, or the interchange or exchange of commodities and that movement from
place to place is the very soul of such trading activities.
In Koteswar v. K.R.B. & Co, a restriction on forward contracts was held to be violative of
Article 301.The supreme court held that a power conferred on the state government to make
an order providing for regulating or prohibiting any class of commercial or financial
transactions relating to any essential Article, clearly permits restrictions on freedom of trade
and commerce and, therefore, its validity has to be assessed with reference to Article 304(b).
In District Collector, Hyderabad v. Ibrahim, the Supreme Court has invalidated under
Article 301 an attempt by a state to create by an administrative order a monopoly to deal in
sugar in favour of cooperative societies. The order was issued while the proclamation of
emergency was operative and so Article 19 (1)(g) could not be invoked. The court therefore
took recourse to Article 301.
43
vis Article 301. This depended on the further question that whether money-lending to poor
villagers which was sought to be prohibited by the Act could be regarded as trade, commerce
and intercourse. The court answered in the negative although it recognised that the money-
lending amongst the commercial community is integral to trade and therefore is trade.
Free
The word 'free' in Article 301 cannot mean an absolute freedom or that each and every
restriction on trade and commerce is invalid. The Supreme Court has held in Atiabari that
freedom of trade and commerce guaranteed by Article 301 is freedom from such restrictions
as directly and immediately restrict or impede the free flow or movement of trade. Therefore
Article 301 would not be attracted if a law creates an indirect or inconsequential impediment
on trade, commerce and intercourse which may be regarded as remote. The word 'free' in
Article 301 does not mean freedom from regulation. As has been observed by the supreme
court: "there is a clear distinction between laws interfering with freedom to carry out the
activities constituting trade and laws imposing on those engaged therein rules of proper
conduct or other restraints directed to the due and orderly manner of carrying out the
activities." Regulation of hours, equipment, weight, size of load, lights, traffic laws are some
examples of regulatory laws which are not hit by Article 301.
Regulations like rules of traffic facilitate freedom of trade and commerce whereas
restrictions impede that freedom. In State of Mysore v. Sanjeeviah , A rule banning
movement of forest produce within the state between 10 p.m; and sunrise was held to be void
under Art. 301 as it was not 'regulatory' but 'restrictive. Tax laws are not excluded from the
scope of Art. 301. A tax which directly and immediately restricts trade would fall within the
purview of Art. 301. From the trend of the case-law it appears that there is a greater
readiness on the part of the courts to characterize an impediment on movement of commerce
as 'direct' and so hold it bad under Art. 301, than the one not on movement which is usually
held to be indirect or remote and so valid, e.g., octroi, sales tax, purchase tax, etc. But sales
tax discriminating between goods of one state from those of another may affect free flow of
trade and so offend Art. 301. A tax levied by Parliament on interstate sale would have
offended Art. 301 as such a tax, in its essence, encumbers movement of trade or commerce
because by its very definition an interstate sale is one which occasions movement of goods
from one state to another. Nevertheless, it was held valid because of Art. 302.
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International tourist corporation v. State of Haryana
Facts: The state of Haryana levied a tax on transporters plying motor vehicles between Delhi
and Jammu & Kashmir. They use national highway, pass through Haryana without picking
up or setting down any passenger in the state. The responsibility for constructing and
maintaining of national highways rests on the Centre. It was therefore argued by the
transporters that the tax could hardly be regarded as compensatory, but the court rejected the
contention.
The Supreme Court said that what is necessary to uphold such a tax is the existence of a
specific, 'identifiable' object behind the levy and a 'sufficient nexus' between the 'subject and
the object of the levy.' The court further said that a state incurs considerable expenditure for
maintenance of roads and providing facilities for transport of goods and passengers. Even in
connection with national highways, a state incurs considerable expenditure not directly by
constructing or maintaining them but by facilitating the transport of goods and passengers
along with them in various ways such as lighting, traffic control, amenities for passengers,
halting places for buses and trucks. That part of a national highway which lies within
municipal limits is to be developed and maintained by the state. There is thus sufficient
nexus between the tax and the passengers and goods carried on the national highways to
justify the imposition of the said tax.
The restrictions which will attract Article 301 must be those which directly and immediately
restrict or impede the free flow or movement of trade. Only those taxes which directly and
immediately restrict trade would fall within the purview of Article 301. the rational and
workable test to apply would be: does the impugned restrictions operate directly or
immediately on trade or its movement? what is prohibited is a tax whose direct effect is to
hinder the movement of trade.
Restriction on freedom of trade, commerce and intercourse throughout the territory of India
cannot be justified unless they fall within Article 304.
45
The object of part XIII is not to make inter-state trade, commerce and intercourse absolutely
free. Reasonable restrictions in public interest are permissible. Regulatory or compensatory
measures cannot be regarded as violative of the freedom unless they are shown to be
colorable measures to restrict the free flow of trade, commerce and intercourse. Therefore
Article 304 allows imposition of such reasonable restrictions on the freedom of trade as are
in public interest.
Conclusion
To conclude this research paper, I would like to say that part XIII is the most badly drafted
part of the constitution of India. The constitution framers had just borrowed this part from
the Australian constitution, (section 92) perhaps, without taking into consideration its further
implications and consequences in a country like India.
¢ Firstly, the freedom enshrined under the part XIII, is subject exception upon exception and
thereby limiting the scope of the said freedom.
¢ Secondly, the constitution framers could not have provided the words like "subject to the
other provisions to this part". If this part is interpreted literally or the literal rule of common
law is applied then it can be said that this part is to be read only with the other provisions of
this part only and not the other provisions of the constitution. but practically it is not so, as
supreme court, in many cases, as referred in this paper, has taken the help or read along with
other provisions of the constitution as well.
¢ Thirdly, these badly drafted provisions can only be cured by the amendment to the
constitution. Therefore, it needs amendment.
¢ Fourthly, it is not a self-contained code. May be the constitution has specifically provided
that it will subject only to the part XIII, but it has to be read in a harmonious way. Therefore,
it is to be read with the other provisions of the constitution.
46
Since the taxing abilities of the states are not necessarily commensurate with their
spending responsibilities, some of the centre’s revenues need to be assigned to the
state governments. On what basis this assignment should be made and on what
guidelines the government should act – the Constitution provides for the formation of
a Finance Commission (FC) by President of India, every five years, or any such earlier
period which the President deems necessary via Article 280. Based on the report of the
Finance Commission, the central taxes are devolved to the state governments.
Separation of Powers
The Union government is responsible for issues that usually concern the country as a
whole, for example national defence, foreign policy, railways, national highways,
shipping, airways, post and telegraphs, foreign trade and banking. The state
governments are responsible for other items including, law and order, agriculture,
fisheries, water supply and irrigation, and public health.
Some items for which responsibility vests in both the Centre and the states include
forests, economic and social planning, education, trade unions and industrial disputes,
price control and electricity. Then, there is devolution of some powers to local
governments at the city, town and village levels.
The taxing powers of the central government encompass taxes on income (except
agricultural income), excise on goods produced (other than alcohol), customs duties,
and inter-state sale of goods. The state governments are vested with the power to tax
agricultural income, land and buildings, sale of goods (other than inter-state), and
excise on alcohol. Local authorities such as Panchayat and Municipality also have
power to levy some minor taxes.
The authority to levy a tax is comes from the Constitution which allocates the power to
levy various taxes between the Centre and the State. An important restriction on this
power is Article 265 of the Constitution which states that “No tax shall be levied or
collected except by the authority of law.” This means that no tax can be levied if it is not
backed by a legislation passed by either Parliament or the State Legislature.
Income (except tax on agricultural income), Corporation Tax & Service Tax
Currency, Coinage, legal tender, Foreign Exchange
Custom duties (except export duties)
Excise on tobacco and other goods.
Estate Duty (except on agricultural goods) (Kindly note that its mentioned in the
constitution but Estate duty was abolished in India in 1985 by Rajiv Gandhi
Government)
Fees related to any matter in Union list except Court Fee
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Foreign Loans
Lotteries by Union as well as State Governments.
Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless Broadcasting,
other forms of communication
Property of the Union
Public Debt of the Union
Railways
Stamp duty on negotiable instruments such as Bills of Exchange, Cheques, Promissory
notes etc.
Reserve Bank of India
Capital gains taxes, Taxes on capital value of assets except farm land
Taxes other than stamp duties on transactions in stock exchanges and future markets
Taxes on the sale and purchase of newspapers and advertisements published therein.
Terminal Taxes on Goods and passengers, carried by Railways and sea or air.
48
Certain Taxes levied as Concurrent Powers
Please note that the Union and the State Governments have the concurrent powers to fix the
principles on which taxes on motor vehicles shall be levied and to impose stamp duties on
non-judicial stamps. The property of the Union is exempted from State Taxation; and the
property of the states is exempted from the Union Taxation. But the parliament of India can
pass legislation for taxation by Union Government of any business activities / trade of the
state which are not the ordinary functions of the state.
Residuary Power of Taxation
Union Government has exclusive powers to impose taxes which are not specifically
mentioned in the state or concurrent lists. Some taxes imposed using these powers include
Gift tax, wealth tax and expenditure tax.
A state cannot impose sales tax if a good is produced there but is sold outside the state.
A state cannot impose sales tax if the sale and purchase is taking place for items due
for export.
A state cannot impose tax on interstate trade and commerce of goods
State cannot impose a tax on a good that has been declared of special importance by
parliament.
(4) No tax shall be levied the proceeds of which are specially appropriated in payment of
expenses for the promotion or maintenance of any particular religion or religious
denomination (Art.27).
(5) A State Legislature or any authority within the State cannot tax the property of the
Union.(Art.285)
(6) The Union cannot tax the property and income of a State (Art.289).
(7) The power of a State to levy tax on sale or purchase of goods is subject to Art.286.
(8) Save in so far as Parliament may, by law, otherwise provide, a State shall not tax the
consumption or sale of electricity in the cases specified in Art.287
The doctrine of excessive delegation is applied by the courts to adjudge the validity of the
provision delegating the power. Therefore, too board power ought not to be vested in the
executive matters of taxation; the parent act ought to contain policy in the light of which the
executive is to exercise the power delegated to it. The courts uphold delegation of power to
decide “ matters of details” concerning the working of the tax law in question. The
expression “matters of details”, in truth, is really an euphemism to cover the delegation of
significant powers to the executive in the tax area.
With regard to delegation in taxing legislation, the following principles may be treated as well
settled:
The power to impose a tax is essentially a legislative function, under article 265 of the
constitution no tax can be levied or collected except by the authority of law, and here law
means law enacted by the legislature and not made by the executive. Therefore, the
legislature cannot delegate the essential legislative function of imposition of tax to an
executive authority.Subject to the above limitation, a power can be conferred on the
government to exempt a particular commodity from the levy of tax. A power may also be
delegated to bring certain commodity under the levy of tax.The power to fix the rate of tax is
a legislative function, but if the legislative policy has been laid down, the said power can be
delegated to the executive.It is open to the legislature or executive to fix different rate of tax
for different commodities.Commodities belonging to the same category should not, however,
be subjected to different and discriminatory rates in the absence of any rational basis.Needs
of the taxing body is not a test for determining whether guidance was furnished by the
50
legislature in exercising power to tax. The circumstance that the affairs of the taxing body
(panchayat, municipality, corporation, etc.,) are administered by the elected representatives
responsible to the people is wholly irrelevant and immaterial in determining whether the
delegation is excessive or otherwise.A taxing statute should be strictly construed. If a
provision is ambiguous, the interpretations that favour the assesse should be accepted.A
distinction, however, should always be made between charging provisions and machinery
provisions should be construed liberally so as to make charging provisions effective and
workable.General principles of delegated legislation apply to taxing statutes also.
Rates of Taxation:
The power to decide what to tax as well as whom to tax was delegated, there are other
varieties of delegation. The executive or the delegate may be empowered to fix the rates of
taxation. Under the central excise and salt act 1944, the government can by notification
increase upto 50% the excise duty levied by the parliament on commodity. Such a
notification is required to be laid before the parliament. Similarly, under the sea customs act,
the executive can vary the rates of taxation provided under the act by exempting certain
goods partially from duty. In such delegation valid? In devi das vs Punjab, the supreme court
upheld a provision which authorised the executive to levy sales tax at a rate between 1
percent and 2 percent. In the same act, however, where power was given to the government
to levy sales tax at such rates `as it deems fit’, the delegation was held to be invalid. In delhi
municipality vs BCS & W Millsthe court upheld a provision, which delegated power to levy
electricity tax, without setting any limits, to the corporation. The court while distinguishing
this case from devi das pointed out that:
(i) The delegation was to a local body which was popularly elected and whose decisions
were taken after public debate;
(ii) The upper limit to the total levy was provided by the needs of the body which had to be
deduced from the nature of its functions;
(iii) The body was subject to government control.
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In nagappa vs IO mines cess commissioner &anor,the supreme courtheld that s 2 of the iron
mines labour welfare act 1958, which authorised the government to levy and collect excise
duty not exceeding 50% tone on iron ore by a notification in the official gazette, was valid.
The proceeds of the levy were to be used fot the welfare of labour and the maxima had been
laid down.
In Gwalior rayon silk manufacturing co ltd vs assistant commissioner of sales tax, S8 (2)(b) of the
central sales tax act which authorised levy of sales tax on sale of goods in the course of inter state
trade and commerce at the rate of 10 percent or at the rate applicable to the sale or purchase of
goods inside the appropriate state, whichever is higher was challenged. The impugned section was
upheld by all the judges, though they differed on the extent of permissible delegation. Khanna j
rejected the argument that since the legislature could repeal the act it had retained enough
control over subordinate legislation and therefore it was not necessary to lay down legislative
policy or guidelines for the delegate. Mathew j, in his dissenting judgment, upheld the argument,
which he again pursued in a majority opinion in n k papiah vs excise commissioner.
Banarasi Das v. State of Madhya Pradesh. In this case the Supreme Court was confronted with the
question as to whether Section 6(2) of Berar Sales Tax Act, 1947 which empowered the State
government to amend the schedule of the Act providing either for exemption from sales tax or to
bring in other goods within the purview of sales tax, was suffering from the vice of excessive
delegation. The Supreme Court speaking through Justice VenkataramaAiyer held that the
impugned provision was not an impermissible delegation of legislative power. The Supreme Court
relied on Raj Narain’s Case and held that the executive can determine details relating to the
working of taxation laws, such as the selection of persons on whom the tax is to be laid and the
rates at which it is to be charged. In the instant case the Court also referred to Powell v. Apollo
Candle Co. Ltd. and Syed Mohammed and Co. v. Madras and Hampton Junior and Co. v. US and
went on to hold that the power conferred by Section 6(2) was not unconstitutional. Actually, the
judicial comprehension of the judgment in Banarasi Das case came to light only after the
subsequent judgments like in the case of Corp. of Calcutta v. Liberty Cinema, wherein the court
held there was no distinction in principle between delegating a power to fix rates of taxes to be
charged on different classes of goods and a power to fix rates simpliciter. Thus, in the instant case
the majority upheld the validity of Section 548(2) of the Calcutta Municipal Act, 1951 was not void
notwithstanding that no guideline was issued
Conclusion
The article was an attempt to address the issue of delegated legislation in tax laws. The very
concept of delegation is opposing to the idea of rigid separation of powers. A strict adherence to
the age old doctrine of separation of powers might do more harm than good. The legislature
cannot be logically expected to enact on the plethora of situations dealing with different classes of
people. In appropriate cases, there could be delegated legislation in tax laws as well but then the
legislature cannot wipe out itself. Thus, the direct and immediate effect of delegation should not
be to confer uncontrolled power on the executive which might endanger the interests of the
subjects. In fact controlling the powers of the executive is the very purpose of the legislative.
According to Wade, administrative law is the law relating to the control of powers of the executive
authorities. Justice Markandey Katju writes in one of his articles that there was a need to create a
body of legal principles to control and to check misuse of these new powers conferred on the
State authorities in this new situation in the public interest. But then it will be a mistake to think
that administrative law is hostile to efficient government. Wade also pointed out that, “intensive
administration will be more tolerable to the citizen, and the Government’s path will be smoother,
52
where the law can enforce high standards of legality, reasonableness and fairness.” As per the
comparative study of the delegation of tax laws in India, United States and England, one
phenomenon which is common in the three systems is that despite the recognition that there
could be a delegation of tax laws by the legislature yet it cannot confer an arbitrary power on the
executive. It is submitted that the model is most developed in the United States where the Courts
look for several checks on the power conferred on the executive. The author will conclude with
this quote by Sir John Donaldson, M.R., in R. v. Lancashire CC, ex p Huddleston on the
development of administrative law: “…administrative law has created a new relationship between
the courts and those who derive their authority from the public law, one of partnership based on a
common.
Suggestion
(i) It is clear that there is a need for the legislature to delegate some tasks to its executive. The
existence of this need in the case of tax laws is even clearer. What is not so clear, however, is
how far this need translates into legally valid actions. The jurisprudence on this point has
expanded and today, we see that the Supreme Court upholds a majority of tax legislations that
confer powers on the executive.
(ii) It might even be said that this attitude displays a sort of special treatment to tax laws. Unlike
in other spheres where the law operates, the Supreme Court seems to be mindful of the fact that
taxation imposes a heavy burden on the State; one that cannot be managed without deep
cooperation between the organs of government. Such cooperation sometime involves extensive
support by the executive.
(iii) To encourage and facilitate this necessary cooperation, the Supreme Court has taken a lenient
view on delegation of legislative functions to the executive. The result has been an ever-
increasing occupation of power by the executive. The only concern that remains unaddressed so
far is whether such extensive delegation will at some time lead to an over powerful executive.
Only time and further case law will give us the answer to this question.
UNIT II
DIRECT TAX REGIME
THE INCOME TAX ACT 1961
BASIS OF TAXATION OF INCOME -BASIC CONCEPTS, PERSON,
RESIDENTIAL STATUS AND INCIDENCE OF TAX, INCOME FROM SALARIES -
INCOME FROM HOUSE PROPERTY - INCOME FROM BUSINESS OR
PROFESSION AND VOCATION - CAPITAL GAINS, INCOME FROM OTHER
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SOURCES - DEEMED ASSESSEE, SET OFF AND CARRY FORWARD LOSS,
INCOMES EXEMPT FROM TAX, PERMISSIBLE DEDUCTIONS AND CHAPTER
VIA DEDUCTIONS, ASSESSMENT, KINDS OF ASSESSMENT, INCOME TAX
AUTHORITIES-APPOINTMENTS-POWERS & FUNCTIONS, PROVISIONS
RELATING TO COLLECTION AND RECOVERY OF TAX-FILING OF RETURNS,
ELECTRONIC FILING, I.T PORTAL WORKING AND REFUND OF TAX,
APPEAL AND REVISION PROVISIONS, OFFENCES AND PENALTIES.
Income Tax
Most of us are familiar with the term ‘income tax’. Come end of financial year, and we all dread a stipulated
deduction from our salary in the name of income tax. But seldom are we aware of the meaning of income tax
and its compositions. So let’s read all about income tax in detail and understand how it affects business
professionals like us.
Income tax is an exclusive and direct means of taxation like capital gains tax, securities transaction tax, etc.
There are many other indirect taxes that we pay such as Goods and Services Tax (GST), sales tax, VAT, Octroi
and service tax.
A large part of revenue for the Government of India comes from the income tax you pay every month or upon
every contractual earning. Ministry of Finance handles these revenue functions and it has delegated the
responsibility to managing direct taxes (like income tax, wealth tax, etc.) to the Central Board of Direct Taxes
(CBDT).
Taxes are calculated on the annual income of a person, and an annual cycle of a year in the eyes of the Income
Tax law. This is applicable from the 1st of April and ends on the 31st of March of the next calendar year. The law
has recognised these years as “Previous Year” and “Assessment Year”.
The year in which income is earned is called previous year and the one in which it is charged to tax is called
assessment year.
1. Voluntary payment by taxpayers to designated banks, like advance tax and self-assessment tax.
2. TDS or Taxes Deducted at Source are the ones which is deducted from your monthly income, before you
receive it.
Income from Salaries: Any form of income that is received from an employer by an employee is taxed
under this heading. Employers have to withhold tax mandatorily under Section 192, in case the income
of their employees falls under a taxable bracket. It is also the employer’s responsibility to also provide
a Form 16, which contains details of tax deductions and net paid income.
Income from House Property: The income, in this case, is taxable if the assesse is the owner of a
property which has been given out on rent. The property here, is not supposed to be used for business
or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means
you and your family live there, and do not have to pay taxes on this. (Read on to know more about
calculating income from house property). Income from house property is calculated as follows:
Profits and Gains Of Business or Profession: These are the types of taxes that are applicable for
income from business or professional services rendered. The provisions for computing the tax on this
type of income is according to Sections 30 to 43D.
55
Income from Capital Gains: These taxes are applicable on income that arises when capital assets are
transferred. Capital assets are defined as a property of any value that is held by the assesse such as
buildings, land, equity shares, bonds, debentures, jewellery, art, assets, etc.
Income from other sources: Any other source of income that cannot be classified under the above
heads of income falls under this heading. There are some specific and pre-determined incomes which
fall under this heading, such as:
o Employee’s share contributed towards staff welfare schemes or any fund set up under the ESIC
Act that is received by the employer from the employees.
o Interest on compensation.
o Gifts.
Income from Salaries: Any form of income that is received from an employer by an employee is taxed
under this heading. Employers have to withhold tax mandatorily under Section 192, in case the income
of their employees falls under a taxable bracket. It is also the employer’s responsibility to also provide
a Form 16, which contains details of tax deductions and net paid income.
Income from House Property: The income, in this case, is taxable if the assesse is the owner of a
property which has been given out on rent. The property here, is not supposed to be used for business
or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means
you and your family live there, and do not have to pay taxes on this. (Read on to know more about
calculating income from house property). Income from house property is calculated as follows:
56
o Income from House Property = (x-y) – z
Profits and Gains Of Business or Profession: These are the types of taxes that are applicable for
income from business or professional services rendered. The provisions for computing the tax on this
type of income is according to Sections 30 to 43D.
Income from Capital Gains: These taxes are applicable on income that arises when capital assets are
transferred. Capital assets are defined as a property of any value that is held by the assesse such as
buildings, land, equity shares, bonds, debentures, jewellery, art, assets, etc.
Income from other sources: Any other source of income that cannot be classified under the above
heads of income falls under this heading. There are some specific and pre-determined incomes which
fall under this heading, such as:
o Employee’s share contributed towards staff welfare schemes or any fund set up under the ESIC
Act that is received by the employer from the employees.
o Interest on compensation.
o Gifts.
Take pencils for example. A $0.25 tax on pencils could result in a $0.10 increase in
price by producers. The producers would be responsible for the remaining $0.15 tax.
These tax burdens have far reaching effects, even for changes under a dollar. Cut
backs made by producers can make their suppliers feel the impact through reduced
use and purchase of required inputs.
The group that is least affect by price will bear the largest amount of the tax
responsibility. To calculate the incidence of tax formula, you can use the pass-through
method.
Price Elasticity of Supply (.5) / (Price Elasticity of Supply (.5) – Price Elasticity of
Demand (-.04)) = 0.5 / [0.5 – (-.0.4)] = 0.5/0.9 = 56% is the amount paid by the buyer.
100% – 56% = 44% is the amount of tax incidence paid by the seller.
Summary Definition
Define Tax Incidence: Incidence of tax means the shift of economic tax burden from
buyer to sellers and vice versa due to changes in the elasticity of demand and supply.
Tax incidence on a taxpayer in India depends upon his residential status. Whether an income
earned by an individual, in or outside India, is taxable in India depends on the residential status of
the individual rather than on his citizenship. People are often under the wrong impression that
taking up foreign citizenship helps obtain tax benefits. However, the Income Tax Act, 1961 (Act)
does not provide tax benefits on the basis of a person’s citizenship.
Taxing jurisdiction
There are three different principles adopted internationally to identify the tax jurisdiction of the
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income of an individual. These principles—citizenship principles, source principle and residence
principle are adopted by different countries as per their choice. In the US, income is taxed based
on citizenship and source based principles, whereas India follows the residence based and source
based taxation system. Under citizenship based taxation, income is taxed on the basis of
citizenship of the taxpayer, whereas under residence based taxation system, income is taxed on
the basis of residential status of the taxpayer.
Under the Income Tax Act, the residential status of an individual is determined on the basis of
period of stay of taxpayers in India. Basis the longevity of the period of stay, residential status is
further classified into further three categories (Residents and Ordinarily Resident (ROR),
Residents but not Ordinarily Residents (RNOR) cumulatively referred as resident; and Non
Residents (NR), depending upon which the income is charged to tax in India.
According to the categorisation of residential status, the Act specifies the scope of income to be
taxable in the hands of RORs, NORs and NRs. It provides that RORs shall be required to pay tax
on their worldwide income whereas RNORs are required to pay tax only on Indian income, plus
any income accruing outside India from a business controlled in or profession set up in India.
However, non-residents are taxed only on income that has its source in India. Entire process of
evaluation of residential status under the Act nowhere requires any emphasis on the citizenship of
an individual.
Another aspect that needs to be kept in mind is that the Double Taxation Avoidance Agreements
(DTAA) also incorporates the concept of residential status. In order to qualify as a resident under a
DTAA entered into by India, an expat should enjoy residential status either in the overseas country
or in India under the domestic laws. There also citizenship has no role to play.
Citizenship has limited relevance as far as Indian taxation is concerned. A person taking up
foreign citizenship, but continuing to stay in India, does not really get any tax benefit. Only if a
person physically stays abroad that he gets the benefit of becoming an NR or an RNOR, who is
liable to pay tax only on Indian income. However, certain HNWIs exploits loopholes in the
aforesaid provisions by shifting their residence to foreign jurisdiction to qualify as non-resident
Indians and liable to tax only on the income accruing or arising in India.
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season. In fact, this is one of the factors based on which a person’s taxability is
decided. Let us explore the residential status and taxability in detail.
Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in
the relevant financial year
In the event an individual leaves India for employment during an FY, he will qualify as a resident of
India only if he stays in India for 182 days or more. This otherwise means, condition (b) above of
60 days would not apply to him
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Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the
year.
3. Taxability
Resident: A resident will be charged to tax in India on his global income i.e. income earned in
India as well as income earned outside India.
NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need
not pay any tax in India on their foreign income.
Also note that in a case of double taxation of income where the same income is getting taxed in
India as well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that
India would have entered into with the other country in order to eliminate the possibility of paying
taxes twice.
Indian tax system is divided into mainly two parts, direct tax and indirect tax. Income Tax Act 1961 applies the direct
tax laws relating to salary earned. It is a broad concept which includes every kind of payment made by an employer to
employee, i.e., monetary as well as non-monetary facilities.
Components of Salary: Salary u/s 17(1) of Income Tax Act comprises of the following:
1. Compensation,
2. Pension or annuity
3. Gratuity
4. Commission, fees, benefits or profits in addition to salary,
5. Advance salary
6. Leave salary,
7. Taxable portion of transfer to recognised provident fund, and
8. The contribution made in pension scheme u/s 80CCD by the Central Government or
the employer to the account of the employee in the previous year.
Particulars Amount
Perquisites 5000
Less: Deductions
Note:
**Professional Tax: Directly reduce if paid by the employee. In case employer pays it, then it is first added to salary
and then deducted.
Allowances: The income from salary includes various benefits that are received by the employee. The allowances that
are exempt to a certain level include House Rent Allowance (HRA), Leave Travel Allowance, etc.
Perquisites: The employees enjoy many perks in addition to the salary received which forms a part of the computation
of income from salary. The employees also enjoy exemption concerning these perquisites.
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TAXABLE INCOME FROM PROPERTY
Owning a house one day – everybody dreams of this, saves towards this and hopes
to achieve this one day. However, owning a house property is not without
responsibilities. Paying house property taxes annually is one of them. If you want to
learn how to save tax on home loan interest, this guide is for you. It also talks about
how to report home ownership in your income tax return.
When a property is used for the purpose of business or profession or for carrying out
freelancing work – it is taxed under the ‘income from business and profession’ head.
Expenses on its repair and maintenance are allowed as business expenditure.
a. Self-Occupied House Property
A self-occupied house property is used for one’s own residential purposes. This may be occupied
by the taxpayer’s family – parents and/or spouse and children. A vacant house property is
considered as self-occupied for the purpose of Income Tax.
Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only
one is considered and treated as a self-occupied property and the remaining are assumed to be
let out. The choice of which property to choose as self-occupied is up to the taxpayer.
For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been
extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and
remaining house as let out for Income tax purposes.
b. Let Out House Property
A house property which is rented for the whole or a part of the year is considered a let out house
property for income tax purposes
c. Inherited Property
An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a
self occupied one or a let out one based on its usage as discussed above.
a. Determine Gross Annual Value (GAV) of the property: The gross annual value
of a self-occupied house is zero. For a let out property, it is the rent collected for a
house on rent.
b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from
GAV of property.
c. Determine Net Annual Value(NAV) : Net Annual Value = Gross Annual Value –
Property Tax
e. Reduce home loan interest: Deduction under Section 24 is also available for
interest paid during the year on housing loan availed.
f. Determine Income from house property: The resulting value is your income
from house property. This is taxed at the slab rate applicable to you.
g. Loss from house property: When you own a self occupied house, since its GAV
is Nil, claiming the deduction on home loan interest will result in a loss from house
property. This loss can be adjusted against income from other heads.
Note: When a property is let out, its gross annual value is the rental value of the
property. The rental value must be higher than or equal to the reasonable rent of the
property determined by the municipality.
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b. The purchase or construction is not completed within 5 years from the end of the FY in which
loan was availed
When is the deduction limited to Rs 30,000?
Note: Interest deduction can only be claimed, starting in the financial year in which
the construction of the property is completed.
How do I claim a tax deduction on a loan taken before the construction of the
property is complete?
Deduction on home loan interest cannot be claimed when the house is under
construction. It can be claimed only after the construction is finished. The period
from borrowing money until construction of the house is completed is called pre-
construction period.
Interest paid during this time can be claimed as a tax deduction in five equal
instalments starting from the year in which the construction of the property is
completed. Understand pre-construction interest better with this example.
The home loan must be for purchase or construction of a new house property.
The property must not be sold in five years from the time you took possession.
Doing so will add back the deduction to your income again in the year you sell.
Stamp duty and registration charges Stamp duty and registration charges and
other expenses related directly to the transfer are also allowed as a deduction under
Section 80C, subject to a maximum deduction amount of Rs 1.5 lakh. Claim these
expenses in the same year you make the payment on them.
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c. Tax Deduction for First-Time Homeowners: Section 80EE
Section 80EE recently added to the Income Tax Act provides the homeowners, with
only one house property on the date of sanction of loan, a tax benefit of up to Rs
50,000.
If you own more than one house, you need to file the ITR-2 form.
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The joint owners, who are also co-borrowers of a self-occupied house property, can
claim a deduction on interest on the home loan up to Rs 2 lakh each. And deduction
on principal repayments, including a deduction for stamp duty and registration
charges under Section 80C within the overall limit of Rs.1.5 lakh for each of the joint
owners. These deductions are allowed to be claimed in the same ratio as that of the
ownership share in the property.
You may have taken the loan jointly, but unless you are an owner in the property –
you are not entitled to the tax benefits. There have been situations where the
property is owned by a parent and the parent and child together take up a loan
which is paid off only by the child. In such a case the child, who is not a co-owner is
devoid of the tax benefits on the home loan.
It’s important to note that the tax benefit of both the deduction on home loan interest
and principal repayment under section 80C can only be claimed once the
construction of the property is complete.
Scenario 1:
You live in a rented accommodation since your house is too small for your
needs
Raghav lives in a rented house in Noida since his own office, son’s school and his
wife’s office are in Noida, He has his own house on the outskirts of Delhi which is
quite small and also lying vacant. He is paying interest on the loan on his own
house.
Scenario 2:
You live in a rented house; your own house is also let out
Neha recently bought a flat in Indore, though she lives and works in Bangalore. She
has no plans of returning to Indore in the next five years so she gives that flat on
rent. She lives on rent in Bangalore.
HRA for the rent she pays for the house in Bangalore and
Claim the entire interest she pays during the year on the home loan
7. Case Study
Aditya earns rental income from his house in Vizag.See how his GAV and NAV are
computed and how much he has to pay as taxes here.
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Income from other sources (Interest income) 4,00,000 4,00,000
Property A
Property B
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Net income from House 60,000 60,000
Property after all
deductions (B)
Property C
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2. If any person had receive/due any compensation or payment managing the whole or
substantially the whole of the affairs of an Indian Company, in connection with the
termination of his management or the modification of the terms & conditions relating
thereto;
3. Income derived from performing specific services for its member by trade, profession
or any other similar association.
4. Any perquisite or benefit arising from business or profession, whether convertible into
money or not.
5. Any Interest income,Commission,Salary or bonus due or received by any partner from
that Company.
6. Any amount received under a Key man Insurance Policy including the amount
allocated by way of bonus on such policy.
7. Income received from any speculative transaction.
8. Any profit received from the transfer of Duty Entitlement Pass book scheme.
9. Any Profit Received on the transfer of the Duty Free Replenishment Certificate.
10.Any profit received on sale of a license granted under the Imports (Control) Order,
1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947)
11.Any amount received or receivable,in cash or in kind under such agreements:
If a person not carrying out any activity in relation to any business.
Or
If a person is not sharing any Know-how,patent, copyright, trade-mark, licence, franchise or any
other business or commercial right of similar nature
Method of Accounting
Under Sec.145, income under Business & Profession shall be computed in accordance with the
method of accounting regularly followed by the assesses. The two recognized methods are Cash
system and Mercantile system of accounting.
Cash System: In this system,all expenses & income are booked when they receive.
Mercantile System of Accounting : All Income & expenses are booked on accrual basis.
Speculative Business: Speculative business is one which carries speculative transaction. It is
consider to be a separate business.
Speculative Transaction: These are those transaction which in which their is a contract for
sale/purchase of shares,stock.
Computation of Income:
Deductions not Admissible:
1. Losses due to illegal trade practices.
2. Expenses not related to the business.
3. Expenses related to Capital Assets
4. Loss on sale of shares.
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5. Future Anticipated Losses
6. Advance paid for commencement of new business which is not established
Computation of Business Profits:
Business Profit should be calculated through profit & Loss Account.In Profit & Loss Account there
are some expenses which are partly allowed or disallowed under Income Tax Act. On the Credit
side of Profit & Loss A/c there are some Income which are tax free or not taxable under the head
Business/Profession.
Balance as per P & L A/c (+) Profit
(-) Loss Amount
Add Expenses claimed but not allowed under the Act
1. All Provisions & Reserves (Provision for Bad Debt/Depreciation/Income)
2. All Taxes (Except Income Tax, Wealth Tax etc.) except sales Tax,Excise
3. Duty,& Local Taxes of premises used for business.
4. All Charities & Donations
5. All personal Expenses
6. Any type of Fine / Penalty
7. Speculative Losses
8. All Capital Losses
9. Any Difference in Profit & Loss Account
10. Previous year Expenses
11. Rent paid to self
12. All expenses related to other head of Income
13. Payments made to the partner (in terms of salary,commission or any other way.)
14. All capital expenses except scientific research
15. Loss by theft
16. Expenses on Illegal Business
17. Rent for Residential portion
18. Interest on Income tax, TDS etc
Total of these Items is added to the profit or adjusted from loss
While calculating the Profit/Loss of Professional all receipt are recorded as their Income &
irrespective of that all the expenses paid in providing the services,office expenses are deducted
from the Income.
The Supreme Court in Chennai Properties & Investments Ltd vs. CIT 2015 (5) TMI 46 (SC) has
observed that merely an entry in the object clause showing a particular object would not be the
determinative factor to arrive at an conclusion whether the income is to be treated as income from
business and such a question would depend upon the circumstances of each case, viz., whether
a particular business is letting or not.
Following are some of professions as per Rule 6F of the I.T. Rules, 1962:
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1. Architectural
2. Accountancy
3. Authorised representative
4. Engineering
5. Film Artist
6. Interior Decoration
7. Legal
8. Medical
9. Technical Consultancy.
“Film artist” means any person engaged in his professional capacity in the production of a
cinematograph film whether produced by him or by any other person, as—
(i) an actor,
(ii) a cameraman;
(iii) a director, including an assistant director;
(iv) a music director, including an assistant music director;
(v) an art director, including an assistant art director;
(vi) a dance director, including an assistant dance director;
(vii) an editor;
(viii) a singer;
(ix) a lyricist;
(x) a story writer;
(xi) a screen-play writer;
(xii) a dialogue writer; and
(xiii) a dress designer.
It was observed by the Madras High Court in reference to section 2(13) in the case of Dr. P.
Vadamalayan vs. CIT (supra) that the definition of ‘business’, being an inclusive definition and not
being exhaustive, is indicative of extension and expansion and not restriction.
The word “profession” & “vocation” have not been defined in the Act while as per section 2(36) of
the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider
import than the word ‘profession”. The words “business” and “vocation” are not synonymous, Upon
a proper construction of the words “business” and “vocation” in the context of the Indian Income-
tax Act, there must be some real, substantive and systematic course of business or conduct
before it can be said that a business or vocation exists the profits of which are taxable as such
under the Act (Upper India Chamber of Commerce, Cawnpore vs. CIT (1947) 15 ITR 263 (All).
Also it was observed in Addl CIT vs. Ram Kripal Tripathi (1980) 125 ITR 408 (All) that the
expression “profession” involves the idea of an occupation requiring purely intellectual skill or
manual skill controlled by the intellectual skill of the operator, as distinguished from an occupation
or business which is substantially the production or sale, or arrangements for the production or
sale, of commodities. “Profession” is a word of wide import and includes “vocation” which is only a
way of living and a person can have more than one vocation, and the vocation need not be for
livelihood nor for making any income nor need it involves systematic and organised activity. It was
observed in Dr. P. Vadamalayan vs. CIT (supra) at page 96) that the term “business” as used in
the fiscal statute cannot ordinarily be understood in its etymological sense. According to the
Shorter Oxford Dictionary, “business” includes a state occupation, profession or trade; profession
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in a wide sense means any calling or occupation by which a person habitually earns his living.
Even so, “trade” is explained as the practice of some occupation, business or profession habitually
carried on. As is not unusual several jurists and eminent judges while attempting to define the
limits of one or the other of the words “business”, profession and trade”, entered the “labyrinth
together but made exits by different paths”. The Supreme Court in Narain Swadeshi Weaving Mills
vs. Commissioner of Excess Profits Tax (1954) 26 ITR 765 (SC), said that the word “business”
connotes some real, substantial and systematic or organised course of activity or conduct with a
set purpose. Venkatarama Aiyar J.,speaking for the court in Mazagaon Dock Ltd. vs. CIT (1958)
34 ITR 368 at page 376 (SC), explained “business” as a word of wide import and in fiscal statutes
it must be construed in a broad rather than a restricted sense. The Supreme Court
in Lakshminarayan Ram Gopal and Son Ltd. vs. Government of Hyderabad (1954) 25 ITR 449 at
page 459 held:
Capital gains are not applicable to an inherited property as there is no sale, only a transfer of
ownership. The Income Tax Act has specifically exempted assets received as gifts by way of
an inheritance or will. However, if the person who inherited the asset decides to sell it,
capital gains tax will be applicable.
A capital asset that is held for less than three years is deemed to be a short-term asset. If sold, it attracts tax at the
normal rates. An asset that has been held for more than three years is deemed as long-term asset, and attracts tax at
concessional rates when sold. The gains arising out of short- term assets are charged as Short-term Capital Gains
and those gains arising from the long tem assets are charged under as Long-term Capital Gains
However, in the case of securities such as equity or preference shares, debentures, government issuing, and units of
mutual funds and the Unit Trust of India (UTI), the assets are deemed short-term if they are held for less than a year.
Conversely, these assets are deemed long-term if they are held for more than a year.
Income of every kind, which is not chargeable to income tax under the heads salary, income from house property,
profits and gains of business and profession, capital gains can be taxed under the head "income from other sources".
This is income that is not chargeable to tax under any other head of income. Such income covers...
a. Dividend
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Under Section 10(33), any amount declared or paid by an Indian company by way of dividend is tax-exempt in the
hands of shareholders. Therefore, any dividend income received from a company that is not an Indian company will
be taxable in the hands of the recipient.
b. Winnings from lotteries, crossword puzzles, horse races and game shows
In the case of winnings from lotteries, crossword puzzles, races (including horse races), card games, game shows and
other games of any sort, or from gambling or betting of any form or nature whatsoever, Rs. 5,000 is exempt from tax.
Tax will be deducted at source on the rest of the winnings at the rate of 30 per cent (plus surcharge).
Winnings from game shows like Kaun Banega Crorepati will be covered by this clause from 1 June 2001. Winnings
before this date will not be subject to TDS; you will have to pay tax yourself.
c. Interest on securities
The income from interest on securities is chargeable to tax if the securities are held as an investment, and not as
stock-in-trade. If the securities are held as stock-in-trade, the interest income is taxable under the head ‘profits and
gains from business or profession’. Although interest income is taxed under the head ‘income from other sources’, a
deduction is available in some cases under section 80L.
d. Others
a. The interest on bank deposits and loans (except in the case of assessees in the money-lending
business).
b. Income from letting-out machinery, plant, furniture or buildings on hire if they are not chargeable to tax
under the head ‘profits and gains from business or profession’.
c. Interest received on a tax refund
d. Ground rent
e. Royalty
f. Director’s fees from a company.
Cost of acquisition The value for which the capital asset was acquired by the
seller.
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NOTE: In certain cases where the capital asset becomes the property of the taxpayer otherwise
than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement
incurred by the previous owner would also be included.
Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC,
54F, and 54B
Long-term capital gain= Full value consideration
(*Expenses from sale proceeds from a capital asset, that wholly and directly relate
to the sale or transfer of the capital asset are allowed to be deducted. These are the
expenses which are necessary for the transfer to take place.)
As per Budget 2018, long term capital gains on the sale of equity shares/ units of
equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1
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lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on
shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year
without the benefit of indexation.
Using the indexed cost of acquisition formula, the adjusted cost of the house is Rs
1.17 crore. The net capital gain is Rs 63, 00,000. Long-term capital gains are taxed
at 20%. For a net capital gain of Rs 63, 00,000, the total tax outgo will be Rs
12,97,800.
This is a significant amount of money to be paid out in taxes. This can be lowered by
taking benefit of exemptions provided by the Income Tax Act on capital gains when
profit from the sale is reinvested into buying another asset.
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Section 54: Exemption on Sale of House Property on
Purchase of Another House Property
The exemption The exemption under section 54 is available when the capital gains
from the sale of house property are reinvested into buying or constructing two
another house properties (prior to Budget 2019, the exemption of the capital gains
was limited to only 1 house property).The exemption on two house properties will be
allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed
Rs. 2 crores. The taxpayer has to invest the amount of capital gains and not the
entire sale proceeds. If the purchase price of the new property is higher than the
amount of capital gains, the exemption shall be limited to the total capital gain on
sale.
Conditions for availing this benefit
1. The new property can be purchased either 1 year before the sale or 2 years after the sale of the
property.
2. The gains can also be invested in the construction of a property, but construction must be
completed within three years from the date of sale.
3. In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or
constructed from the capital gains to claim this exemption.
4. Please note that this exemption can be taken back if this new property is sold within 3 years of
its purchase/completion of construction.
If you are not keen to reinvest your profit from the sale of your first property
into another one, then you can invest them in bonds for up to Rs. 50 lakhs
issued by National Highway Authority of India (NHAI) or Rural Electrification
Corporation (REC).
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The money invested can be redeemed after 3 years, but they cannot be sold
before the lapse of 3 years from the date of sale. With effect from the FY
2018-2019, the period of 3 years has been increased to 5 years;
The homeowner has six month’s time to invest the profit in these bonds. But to
be able to claim this exemption, you will have to invest before the tax filing
deadline.
The new agricultural land, which is purchased to claim capital gains exemption,
should not be sold within a period of 3 years from the date of its purchase. In case
you are not able to purchase agricultural land before the date of furnishing of your
income tax return, the amount of capital gains must be deposited before the date of
filing of return in the deposit account in any branch (except rural branch) of a public
sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.
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Income from Other Sources is one of the heads of income chargeable to tax under the Income tax Act. 1961. Any
income that is not covered in the other four heads of income is taxable under income from other sources, because of
this, it is known as residuary head of income. All the incomes excluded from salary, capital gains, house property or
business & profession (PGBP) are included in IFOS, except those which are exempt under the Income Tax Act.
Section 56- Incomes taxable only in Income from Other
Sources are
1. Dividend Income;
2. Income earned from winning lotteries, crossword puzzles, races (including horse race),
gambling or betting of any kind;
3. Money or movable/immovable property received without consideration or inadequate
consideration during previous year;
4. Interest on compensation or enhanced compensation received;
5. Advance money received or money received in negotiation for transfer of a capital
asset (only if the money is forfeited and it doesn't result in the transfer of such asset).
Incomes taxable under IFOS, only if not taxable under Profits and Gains of Business or Profession (PGBP):
1. Any sum contributed towards provident funds, ESI, etc. by employee to the employer,
only if not deposited in the relevant fund;
2. Interest earned on Securities;
3. Income received from the letting of a plant, machinery or furniture, with or without
building.
4. Incomes taxable under IFOS, only if not taxable under PGBP or Salaries:
5. Keyman Insurance Policy;
6. Salary of MP/MLA.
Income Computation and Disclosure Standards: Section 145 states that Income from Other Sources must be
computed on the regular accounting methods followed by the assessee. It can be either cash or mercantile system of
accounting. The Central Government has notified Income Computation and Disclosure Standards to be followed while
computing the income.
Section 57- Expenditures allowed as deductions
1. Expenses incurred for realisation of dividend or interest income;
2. Deductions to the extent amount remitted within due date are authorised in respect to
contribution towards funds for the welfare of employees;
3. Family Pension- deduction is allowed to the extent of 33-1/3% of pension or Rs.
15000 whichever is less;
4. Deductions for current repairs, insurance and depreciation, will be allowed for income
earned by way of lease rental;
5. A deduction equal to 50% will be allowed for interest received on compensation or
enhanced compensation.
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Section 58- Sum not allowed as deductions while computing
taxable income
1. Personal expenditure;
2. Interest or salary payable outside India without TDS deduction;
3. Wealth tax;
4. Expenditure concerning winnings from lotteries, crossword puzzles, races, and
gambling, etc.; and
5. Expenses specified in Section 40A.
An Assessee may be any individual liable to pay taxes for himself or to pay tax on behalf of
somebody else. The Income Tax Act, 1961 has classified Assessee in different categories.
An Assessee may either be a normal Assessee, a Representative Assessee, a Deemed
Assessee or an Assessee in Default.
Let us understand what the various categories of Assesses as laid down in the Act are
and who all belong to the respective categories of being an Assessee:
1. Normal Assessee:
A normal Assessee is an individual who is liable to pay taxes for the income earned by
him for a particular financial year. Each and every Individual who has paid taxes in
preceding years against the income earned or losses incurred by him is liable to make
payments to the government in the form of tax. Any individual who is supposed to make
payments to the government in the form of interest or penalty or anybody who is entitled
to tax refund under the IT Act is an Assessee. All such individuals are grouped under the
category of Normal Assessee.
2. Representative Assessee:
Many times, it so happens that an individual is liable to pay taxes for income or losses
incurred not only by him, but also for income or losses incurred by a third party. Such an
individual is known as Representative Assessee. Basically, he acts as a representative for
people who themselves are not in a position to file and pay their taxes themselves.
Generally, the people who need representatives are non-residents, minors or lunatics.
And the people representing them are either their agents or guardians. Such people are
deemed to be Representative Assesses
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3. Deemed Assessee:
Deemed Assessee is an individual who is put in a position to pay taxes for some other
person by the legal authorities. Generally, the individuals who are treated as Deemed
Assesses are:
The executors or the legal heir of the property of a deceased person, who in written
has passed on his property to the executor, is treated as a Deemed Assessee.
The eldest son or any other legal heir of a deceased individual (who has expired
without writing his will) is treated as a Deemed Assessee.
The guardian of a minor, a lunatic or an idiot is treated as a Deemed Assessee.
The agent of a Non-Resident Indian (having Income Sources in India) is treated as
a deemed Assessee.
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4. Assessee-in-default:
The Assessee must make sure to file his tax returns for the evaded income for the
particular assessment year as soon as he receives the notice from the department.
Having filed the returns, he may request the assessing officer for a copy which
clearly indicates the reasons for which the notice has been issued by the officer to
him.
If the Assessee feels that the reasons stated in the copy are not valid, and that he
is not satisfied with the reasons, he may choose to file an object and challenge the
notice and its validity.
The Assessee must also make sure that he has solid reasons to file the objection
and that he has rightfully decided to raise questions on the notice issued by the
government to him.
The Assessee may also choose to put forward a request to the concerned Assessing
Officer and ask him to give other reasons, if the claims made by Assessee are
dismissed by the officer.
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With the help of a writ petition filed with the respective High Court, the Assessee
may choose to challenge the legality of the notice much before the completion of
the scheduled assessment or re-assessment.
With the help of a writ petition filed with the respective High Court, the Assessee
may also choose to challenge the legality of the notice even after completion of the
scheduled assessment.
The Assessee has to mandatorily furnish details pertaining to his income returns
within a period of 30 days from the date of issuance of the notice and not from the
date on which the notice has been received by the Assessee. The details pertaining
to the income for which tax payment has been avoided and other related income
details must be clearly furnished and submitted to the concerned officer in order to
avoid problems at a later stage.
The Assessee has to ascertain that :* He has put forward a request to the
Assessing Officer asking for reasons as to why the notice has been issued by him.
* He has lodged an objection to the given notice and the reasons given to him by
the Assessing Officer as he finds them to be unsatisfactory.
* He has knowingly challenged the validity of the issued notice.
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4. Losses from a specified business will be set off only against profit of specified businesses. But
the losses from any other businesses or profession can be set off against profits from the specified
businesses.
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Speculative Business Loss :
Can be carry forward up to next 4 assessment years from the assessment
year in which the loss was incurred
Can be adjusted only against Income from speculative business
Cannot be carried forward if the return is not filed within the original due date.
Not necessary to continue the business at the time of set off in future years
Capital Losses :
Can be carry forward up to next 8 assessment years from the assessment
year in which the loss was incurred
Long-term capital losses can be adjusted only against long-term capital gains.
Short-term capital losses can be set off against long-term capital gains as well
as short-term capital gains
Cannot be carried forward if the return is not filed within the original due date
Points to note:
1.A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax,
cannot set off these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries,
races, card games, betting etc.
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16. Commuted value of Pension Received [Section 10(10A)]
17. Amount received as Leave Encashment on Retirement [Section 10(10AA)]
18. Retrenchment Compensation received by Workmen [Section 10(10B)]
19. Payment received under Bhopal Gas Leak Disaster (Processing of Claims) Act 1985 [Section 10 (10BB)]
20. Compensation received in case of any disaster [Section 10(10BC) ]
21. Retirement Compensation from a Public Sector Company or any other Company [Section 10(10C)]
22. Tax on Non-monetary Perquisites paid by Employer [Section 10(10CC)]
23. Amount received under a Life Insurance Policy [Section 10(10D)]
24. Statutory Provident Fund [Section 10(11)]
25. Recognized Provident Fund [Section 10(12)]
26. Superannuation Fund [Section 10(13)]
27. House Rent Allowance-HRA [Section 10(13A)]
28. Business Expenditure Allowance [Section 10(14)]
29. Interest Incomes [Section 10(15)]
30. Scholarship [Section 10(16)]
31. Allowance of M.P./M.L.A.I or M.L.C. [Section 10(17)]
32. Awards Instituted by Government [Section 10(17A)]
33. Pension received by certain winners of gallantry awards [Section 10(18)]
34. Family pension received by family members of armed forces including para military forces [Section
10(19)]
35. Income of a Local Authority [Section 10(20)]
36. Income of Scientific Research Association [Section 10(21)]
37. Income of a News Agency [Section 10(22B)]
38. Income of some Professional Institutions [Section 10(23A)]
39. Exemption of Income Received by Regimental Fund [Section 23AA] a. Income of a Fund set-up for the
welfare of employees or their dependents [Section 10(23AAA)] b. Income of a pension fund set up by
LIC or other insurer [Section 10(23AAB)]
40. Income of State Level Khadi and Village Industries Board [Section 10(23BB)] a. Income of certain
Authorities set up to manage Religious and Charitable Institutions [Section 10(23BBA)] b. Income of
European Economic Community [Section 10(23BBB)] c. Income of a SAARC Fund for regional projects
[Section 10(23BBC)] d. Any income of Insurance Regulatory and Development Authority [Section
10(23BBE)] e. Income of Prasar Bharti [Section 10(23BBH)] [Inserted by the Finance Act 2012, w.e.f.
2013-14]
41. Any income received by a person on behalf of following Funds [Section 10(23C)]
42. Income of Mutual Fund [Section 10(23D)]
43. Exemption of income of a securitization trust [Section 10(23DA)j [w.e.f. A.Y. 2014-15]
44. Income of Investor Protection Fund [Section 10(23EA)]
45. Exemption of income of investor protection fund of depository [Section 10(23ED)] [w.e.f. A.Y. 2014-15]
46. Exemption for Certain Incomes of a Venture Capital Company or Venture Capital Fund from Certain
Specified Business or Industries [Section 10 (23FB)]
47. Income of Registered Trade Unions [Section 10(24)]
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48. Income of Provident and Superannuation Funds [Section 10(25)]
49. Income of Employee’s State Insurance Fund [Section 10 (25A)]
50. Income of Schedule Tribe Members [Section 10(26) and 10(26A)]
51. Income of Sikkimese individual [Section 10(26AAN] (With retrospective effect from 1-4-1990)
52. Regulating the marketing of agricultural produce [Section 10[26AAB]
53. Income of a corporation set-up for promoting the interests of Scheduled Castes, Scheduled Tribes or
Backward Classes [Section 10(26B)]
54. Income of a corporation set-up to protect the interests of Minorities [Section 10(26BB)]
55. Any income of a Corporation established for Ex-Servicemen [Section 10(26BBB)]
56. Income of cooperative society looking after the interests of Scheduled Castes or Scheduled Tribes or
Both [Section 10(27)]
57. Any income accruing or arising to Commodity Boards etc. [Section 10(29A)]
58. Amount received as subsidy from or through the Tea Board [Section 10(30)]
59. Amount received as subsidy from or through the concerned Board [Section 10(31)]
60. Income of Child Clubbed U/s 64 (IA) [Section 10(32)]
61. Income by way of dividend from Indian company [Section 10(34)]
62. Exemption of income to a shareholder on buyback of shares of unlisted company [Section 10 (34A)
[w.e.f. A.Y. 2014-15]
63. Exemption of income from Units [Section 10(35)]
64. Exemption of income from Securitization Trust [Section 10(35A)] [w.e.f A.Y. 2014-15]
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6. Any form of perquisites received
7. Amount received from a Voluntary Retirement Scheme
For self-employed or non-salary account holders, there are certain incomes categorized under exempt income.
They include dividends, agricultural income, interest on funds, capital gains which has to be disclosed under
Schedule EI while filing income tax as per ITR-1.
1. Section 80C
Deductions on Investments
You can claim a deduction of Rs 1.5 lakh your total income under section 80C. In simple terms,
you can reduce up to Rs 1,50,000 from your total taxable income, and it is available for individuals
and HUFs.
filing your Income Tax Return. The Income Tax Department will refund the excess
money to your bank account.
Investments
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1. Investment in Public Provident Fund (PPF)
A PPF account can be opened and deposit made in the account can be claimed
for deduction. A maximum of Rs. 1,50,000 is allowed to be invested in one
financial year. The minimum investment required in each year is Rs. 500.
Interest is compounded annually and is reset quarterly. Interest on PPF
account is fully tax-free. The PPF account matures after 15 years. Receipts on
maturity or withdrawals are tax-free. The amount invested is allowed to be
withdrawn after 5 years. PPF account deposit in the name of your spouse or
child can also be claimed for the tax deduction in your tax return.
2. Purchase of NSCs
National Savings Certificate or NSC is eligible for deduction in the year they are
purchased. These can be bought from designated Post Office. Their term is for
5 years and interest earned is compounded annually. Interest earned is
taxable. Interest earned is also eligible for deduction under section 80C during
the term of the NSCs (except the last year).
4. Investment in ELSS
ULIPS sold with life insurance are also eligible for deduction under section 80C.
This includes Contribution to Unit Linked Insurance Plan of LIC Mutual Fund
e.g. Dhanraksha 1989 and contribution to Other Unit Linked Insurance Plan of
UTI. Deduction claimed under ULIP will be withdrawn if the policy terminates
before paying the premium for 5 years. ULIP proceeds after maturity is exempt
from tax. ULIPin the name of your spouse or child can also be claimed for the
tax deduction in your tax return.
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6. Five Year Post Office Time Deposit Scheme
This is similar to bank fixed deposits. Although available for varying time
duration like one year, two years, three years and five years, only 5-Yr post-
office time deposit (POTD) qualifies for tax saving. Interest is compounded
quarterly but paid annually. The Interest is entirely taxable.
The amount deposited under Senior Citizens Saving Scheme: A recent addition
to the list, Senior Citizen Savings Scheme (SCSS) is a small savings schemes
but is meant only for senior citizens. Interest is payable quarterly instead of
compounded quarterly. Thus, unclaimed interest on these deposits won’t earn
any further interest. Interest income is chargeable to tax. The account may be
opened by an individual,
Who has attained an age of 60 years or above on the date of opening of the
account?
Who has attained the age 55 years or more but less than 60 years and has
retired under a Voluntary Retirement Scheme or a Special Voluntary
Retirement Scheme on the date of opening of the account within three months
from the date of retirement.
No age limit for the retired personnel of Defence services provided they fulfill
other specified conditions.
10. Sum paid as a subscription to Home Loan Account Scheme of the National
Housing Bank or contribution to any notified deposit scheme / pension fund set
up by National Housing Bank.
12. Contribution to notified annuity Plan of LIC (e.g. Jeevan Dhara and Jeevan
Akshay) or Units of UTI / notified Mutual Funds.
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13. Subscription to equity shares / debentures forming part of any approved
eligible issue of capital made by a public company or public financial
institutions.
Expenses
1. EPF or Employee’s share of PF Contribution
Employee contribution to EPF is eligible for deduction under section 80C i.e.
12% of your Basic + DA is deducted by the employer and deposited as your
contribution in Employee’s Provident Fund Scheme or Recognized Provident
Fund.
The policy must be in the taxpayer’s name or spouse’s or any child’s name
(child may be dependent/independent, minor/major, or married/unmarried).
The deduction is valid on insurance policies purchased after 1st April 2012 only
if the premium is less than 10% of sum assured. Benefits for existing
purchased policies continue. The deduction is also allowed on payments made
by Government employees to Central Government Employees Insurance
Scheme. Receipts on maturity are tax-free. Deduction claimed will be
withdrawn if the policy terminates with 2 years.
The deduction can be claimed for Tuition fees paid to any school, college,
university or other educational institution situated within India for the purpose
of full-time education of any two children (including payments for play school,
pre-nursery and nursery).
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5. Sum paid for securing Deferred Annuity
You can claim this if you deposit in your pension account. Maximum deduction you
can avail is 10% of salary (in case the taxpayer is an employee) or 20% of gross
total income (in case the taxpayer being self-employed) or Rs 1.5 lakh – whichever
is less.
Until FY 2016-17, maximum deduction allowed was 10% of gross total income for
self-employed individuals.
b.Deduction for self-contribution to NPS – section 80CCD (1B) A new section 80CCD (1B)
has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a
taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.
c. Employer’s contribution to NPS – Section 80CCD (2) Claim additional deduction on your
contribution to employee’s pension account for up to 10% of your salary. There is no monetary
ceiling on this deduction.
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4. Section 80 TTA – Interest on Savings Account
Deduction from Gross Total Income for Interest on Savings
Bank Account
If you are an individual or an HUF, you may claim a deduction of maximum Rs
10,000 against interest income from your savings account with a bank, co-operative
society, or post office. Do include the interest from savings bank account in other
income.
Section 80TTA deduction is not available on interest income from fixed deposits,
recurring deposits, or interest income from corporate bonds.
An online e-filing software like that of ClearTax can be extremely easy as the limits
are auto-calculated. So, you do not have to worry about making complex
calculations.
From FY 2016-17 available deduction has been raised to Rs 5,000 a month from Rs
2,000 per month.
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6. Section 80E – Interest on Education Loan
Deduction for Interest on Education Loan for Higher Studies
A deduction is allowed to an individual for interest on loans taken for pursuing higher
education. This loan may have been taken for the taxpayer, spouse or children or for
a student for whom the taxpayer is a legal guardian.
80E deduction is available for a maximum of 8 years (beginning the year in which
the interest starts getting repaid) or till the entire interest is repaid, whichever is
earlier. There is no restriction on the amount that can be claimed.
FY 2013-14 and FY 2014-15 During these financial years, the deduction available
under this section was first-time house worth Rs 40 lakh or less. You can avail this
only when your loan amount during this period is Rs 25 lakh or less. The loan must
be sanctioned between 1 April 2013 and 31 March 2014. The aggregate deduction
allowed under this section cannot exceed Rs 1 lakh and is allowed for FY 2013-14
and FY 2014-15.
Rajiv Gandhi Equity Scheme has been discontinued starting from 1 April 2017.
Therefore, no deduction under section 80CCG will be allowed from FY 2017-
18. However, if you have invested in the RGESS scheme in FY 2016-17, then you
can claim deduction under Section 80CCG until FY 2018-19.
In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction
available under this section is up to Rs.1 lakh.
Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum
deduction Rohan can claim under section 80D is Rs. 100,000. From FY 2015-16 a
cumulative additional deduction of Rs. 5,000 is allowed for preventive health check.
Also remember that you need to get a prescription for such medical treatment from
the concerned specialist in order to claim such deduction. Read our detailed article
on Section 80DDB.
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From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to Rs
75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.
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Swachh Bharat Kosh (applicable from financial year 2014-15)
Clean Ganga Fund (applicable from financial year 2014-15)
National Fund for Control of Drug Abuse (applicable from financial year 2015-
16)
c. Donations to the following are eligible for 100% deduction subject to 10% of adjusted gross
total income
d. Donations to the following are eligible for 50% deduction subject to 10% of adjusted gross
total income
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18. Deductions-Summary
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Allowed Limit
Section Deduction on (maximum) FY 2018-19
80TTB Exemption of interest from banks, post office, etc. Maximum up to 50,000
Applicable only to senior citizens
80GG For rent paid when HRA is not received from Least of :
employer – Rent paid minus 10%
of total income
– Rs. 5000/- per month
– 25% of total income
80EE Interest on home loan for first time home owners Rs 50,000
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Allowed Limit
Section Deduction on (maximum) FY 2018-19
ASSESSMENT, KINDS OF
ASSESSMENT
Article discusses about Meaning of assessment, Scope/Procedure/Time limit of
Assessment under section 143(1)/ section 143(3)/ section 144/ section 147.
Every taxpayer has to furnish the details of his income to the Income-tax Department. These
details are to be furnished by filing up his return of income. Once the return of income is filed up by
the taxpayer, the next step is the processing of the return of income by the Income Tax
Department. The Income Tax Department examines the return of income for its correctness. The
process of examining the return of income by the Income-Tax department is called as
“Assessment”. Assessment also includes re-assessment and best judgment assessment under
section 144.
Under the Income-tax Law, there are four major assessments given below:
Assessment under section 143(1), i.e., Summary assessment without calling the
assessee.
Assessment under section 143(3), i.e., Scrutiny assessment.
Assessment under section 144, i.e., Best judgment assessment.
Assessment under section 147, i.e., Income escaping assessment.
Assessment under section 143(1)
This is a preliminary assessment and is referred to as summary assessment without calling the
assessee (i.e., taxpayer).
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Scope of assessment under section 143(1)
Assessment under section 143(1) is like preliminary checking of the return of income. At this stage
no detailed scrutiny of the return of income is carried out. At this stage, the total income or loss is
computed after making the following adjustments (if any), namely:-
(i) any arithmetical error in the return; or
(ii) an incorrect claim (*), if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set-off of loss is claimed
was furnished beyond the due date specified under section 139(1); or
(iv) disallowance of expenditure indicated in the audit report but not taken into account in
computing the total income in the return; or
(v) disallowance of deduction claimed u/s 10AA, 80IA to 80-IE, if the return is furnished beyond the
due date specified under section 139(1); or
(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been
included in computing the total income in the return. However, no such adjustment shall be made
in relation to a return furnished for the assessment year 2018-19 and thereafter.
However, no such adjustment shall be made unless an intimation is given to the assessee of such
adjustment either in writing or in electronic mode. Further, the response received from the
assessee, if any, shall be considered before making any adjustment, and in case where no
response is received within 30 days of the issue of such intimation, such adjustments shall be
made.
For the above purpose “an incorrect claim apparent from any information in the return” means a
claim on the basis of an entry in the return :-
(i) of an item which is inconsistent with another entry of the same or some other item in such
return;
(ii) in respect of which the information is required to be furnished under the Act to substantiate
such entry and has not been so furnished; or
(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may
have been expressed as monetary amount or percentage or ratio or fraction;
Procedure of assessment under section 143(1)
After correcting arithmetical error or incorrect claim (if any) as discussed above, the
tax and interest and fee*, if any, shall be computed on the basis of the adjusted
income.
Any sum payable by or refund due to the taxpayer shall be intimated to him.
An intimation shall be prepared or generated and sent to the taxpayer specifying the
sum determined to be payable by, or the amount of refund due to the taxpayer.
An intimation shall also be sent to the taxpayer in a case where the loss declared in the
return of income by the taxpayer is adjusted but no tax or interest is payable by or no
refund is due to him.
The acknowledgement of the return of income shall be deemed to be the intimation in
a case where no sum is payable by or refundable to the assessee or where no
adjustment is made to the returned income.
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*As per section 234F (as inserted by Finance Act, 2017 with effect from Assessment Year 2018-
19), a fee shall be levied where the return of income is not filed within the due dates prescribed
under section 139(1). The amount of fee is as follows:-
(a) Rs. 5,000, if the return is furnished on or before the 31st day of December of the assessment
year;
(b) Rs. 10,000 in any other case:
Provided that if the total income of the person does not exceed Rs. 5,00,000, the amount of fee
shall not exceed Rs. 1000.
Time-limit
Assessment under section 143(1) can be made within a period of one year from the end of the
financial year in which the return of income is filed.
Assessment under section 143(3)
This is a detailed assessment and is referred to as scrutiny assessment. At this stage a detailed
scrutiny of the return of income will be carried out is to confirm the correctness and genuineness of
various claims, deductions, etc., made by the taxpayer in the return of income.
Scope of assessment under section 143(3)
The objective of scrutiny assessment is to confirm that the taxpayer has not understated the
income or has not computed excessive loss or has not underpaid the tax in any manner.
To confirm the above, the Assessing Officer carries out a detailed scrutiny of the return of income
and will satisfy himself regarding various claims, deductions, etc., made by the taxpayer in the
return of income.
Procedure of assessment under section 143(3)
If the Assessing Officer considers it necessary or expedient to ensure that the taxpayer
has not understated the income or has not computed excessive loss or has not
underpaid the tax in any manner, then he will serve on the taxpayer a notice requiring
him to attend his office or to produce or cause to be produced any evidence on which
the taxpayer may rely, in support of the return.
To carry out assessment under section 143(3), the Assessing Officer shall serve such
notice in accordance with provisions of section 143(2).
Notice under section 143(2) should be served within a period of six months from the
end of the financial year in which the return is filed.
The taxpayer or his representative (as the case may be) will appear before the
Assessing Officer and will place his arguments, supporting evidences, etc., on various
matters/issues as required by the Assessing Officer.
After hearing/verifying such evidence and taking into account such particulars as the
taxpayer may produce and such other evidence as the Assessing Officer may require
on specified points and after taking into account all relevant materials which he has
gathered, the Assessing Officer shall, by an order in writing, make an assessment of
the total income or loss of the taxpayer and determine the sum payable by him or
refund of any amount due to him on the basis of such assessment.
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E-Assessments
The Finance Act, 2018 has inserted a new sub-section (3A) in Section 143 that the Central Govt.
may make a scheme for the purpose of making assessment so as to impart greater efficiency,
transparency and accountability by:
A. Eliminating the interface between the Assessing Officer and the assessee in the course of
proceeding to the extent technologically feasible;
B. Optimising utilization of the resources through economies of scale and functional specialization;
C. Introducing a team-based assessment with dynamic jurisdiction.
As part of e-governance initiative to facilitate conduct of assessment proceedings electronically,
Income-tax Dept. has launched ‘E-Proceeding’ facility. Under this initiative, CBDT has made it
mandatory for the tax officers to take recourse of electronic communications for all limited and
complete scrutiny. The CBDT had issued the instructions and notice formats for conducting
scrutiny assessments electronically. As per the instruction, except search related assessments, all
scrutiny assessments shall be conducted only through the ‘E-Proceeding’ functionality available at
e-filing website of Income-tax Dept.
Time-limit
As per Section 153, the time limit for making assessment under section 143(3) is:-
1) Within 21 months from the end of the assessment year in which the income was first
assessable. [For assessment year 2017-18 or before]
2) 18 months from the end of the assessment year in which the income was first assessable. [for
assessment year 2018-19]
3) 12 months from the end of the assessment year in which the income was first assessable
[Assessment year 2019-20 and onwards]
Note:- If reference is made to TPO, the period available for assessment shall be extended by 12
months.
Assessment under section 144
This is an assessment carried out as per the best judgment of the Assessing Officer on the basis
of all relevant material he has gathered. This assessment is carried out in cases where the
taxpayer fails to comply with the requirements specified in section 144.
Scope of assessment under section 144
As per section 144, the Assessing Officer is under an obligation to make an assessment to the
best of his judgment in the following cases:-
If the taxpayer fails to file the return required within the due date prescribed under
section 139(1) or a belated return under section 139(4) or a revised return under
section 139(5).
If the taxpayer fails to comply with all the terms of a notice issued under section
142(1).
Note: The Assessing Officer can issue notice under section 142(1) asking the taxpayer to file the
return of income if he has not filed the return of income or to produce or cause to be produced
such accounts or documents as he may require and to furnish in writing and verified in the
prescribed manner information in such form and on such points or matters (including a statement
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of all assets and liabilities of the taxpayer, whether included in the accounts or not) as he may
require.
If the taxpayer fails to comply with the directions issued under section 142(2A).
Note : Section 142(2A) deals with special audit. As per section 142(2A), if the
conditions justifying special audit as given in section 142(2A) are satisfied, then the
Assessing Officer will direct the taxpayer to get his accounts audited from a chartered
accountant nominated by the principal chief commissioner or Chief Commissioner or
Principal Commissioner or Commissioner and to furnish a report of such audit in the
prescribed form.
If after filing the return of income the taxpayer fails to comply with all the terms of a
notice issued under section 143(2), i.e., notice of scrutiny assessment.
If the assessing officer is not satisfied about the correctness or the completeness of the
accounts of the taxpayer or if no method of accounting has been regularly employed
by the taxpayer.
From the above criteria, it can be observed that best judgment assessment is resorted
to in cases where the return of income is not filed by the taxpayer or if there is no
cooperation by the taxpayer in terms of furnishing information / explanation related to
his tax assessment or if books of accounts of taxpayer are not reliable or are
incomplete.
Procedure of assessment under section 144
If the conditions given above calling for best judgment are satisfied, then the
Assessing Officer will serve a notice on the taxpayer to show cause why the
assessment should not be completed to the best of his judgment.
No notice as given above is required in a case where a notice under section 142(1) has
been issued prior to the making of an assessment under section 144.
If the Assessing Officer is not satisfied by the arguments of the taxpayer and he has
reason to believe that the case demands a best judgment, then he will proceed to carry
out the assessment to the best of his knowledge.
If the criteria of the best judgment assessment are satisfied, then after taking into
account all relevant materials which the Assessing Officer has gathered, and after
giving the taxpayer an opportunity of being heard, the Assessing Officer shall make
the assessment of the total income or loss to the best of his knowledge/judgment and
determine the sum payable by the taxpayer on the basis of such assessment.
Time-Limit
As per Section 153, the time limit for making assessment under section 144 is:-
1) Within 21 months from the end of the assessment year in which the income was first
assessable. [For assessment year 2017-18 or before]
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2) 18 months from the end of the assessment year in which the income was first assessable. [for
assessment year 2018-19]
3) 12 months from the end of the assessment year in which the income was first assessable
[Assessment year 2019-20 and onwards]
Note:- If reference is made to TPO, the period available for assessment shall be extended by 12
months.
Assessment under section 147
This assessment is carried out if the Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment for any assessment year
Scope of assessment under section 147
The objective of carrying out assessment under section 147 is to bring under the tax
net any income which has escaped assessment in original assessment.
Original assessment here means an assessment under sections 143(1), 143(3), 144 and
147 (as the case may be).
In other words, if any income has escaped (*) from being taxed in the original
assessment made under section 143(1) or section 143(3) or section 144 or section 147,
then the same can be brought under tax net by resorting to assessment under section
147.
In the following cases, it will be considered as income having escaped assessment:
Where no return of income has been furnished by the taxpayer, although his total
income or the total income of any other person in respect of which he is assessable
during the previous year exceeded the maximum amount which is not chargeable to
income-tax.
Where a return of income has been furnished by the taxpayer but no assessment has
been made and it is noticed by the Assessing Officer that the taxpayer has understated
the income or has claimed excessive loss, deduction, allowance or relief in the return.
Where the taxpayer has failed to furnish a report in respect of any international
transaction which he was required to do under section 92E.
Where an assessment has been made, but:
i. income chargeable to tax has been under assessed; or
ii. income has been assessed at low rate; or
iii. income has been made the subject of excessive relief; or
iv. excessive loss or depreciation allowance or any other allowance has been
computed;
Where a person is found to have any asset (including financial interest in any entity)
located outside India.
Where a return of income has not been furnished by the assessee and on the basis of
information or document received from the prescribed income-tax authority under
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section 133C(2), it is noticed by the Assessing Officer that the income of the assessee
exceeds the maximum amount not chargeable to tax.
Where a return of income has been furnished by the assessee and on the basis of
information or document received from the prescribed income-tax authority under
section 133C(2), it is noticed by the Assessing Officer that the assessee has
understated the income or has claimed excessive loss, deduction, allowance or relief in
the return.
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Types of Income Tax Assessment:
1. Self Assessment –u/s 140A
2. Summary assessment –u/s 143(1)
3. Scrutiny assessment –u/s 143(3)
4. Best Judgment Assessment –u/s 144
5. Protective assessment
6. Re-assessment or Income escaping assessment –u/s 147
7. Assessment in case of search –u/s 153A
Tax payable is required to be furnished under section 139 or section 142 or section 148 or section
153A, after taking TDS and deducting Advance tax paid.
Time limit:
There are no specific dates to pay Self Assessment Tax. Payment of Self Assessment Tax and
non-filing of the returns should be paid within 31st July of every year.
Procedure
Direct Mode of Payment
Self Assessment Tax can be paid by filling a tax payment challan, ITNS 280. Challans are
available in the designated branches of banks associated with the Income Tax Department.
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Time Limit:
Assessment u/s 143(1) can be made within a period of one year from the end of financial year in
which the return is filed.
The assessing officer gets the opportunity to conduct an inquiry and aims at ascertaining whether
the income in the return is correctly shown by the assessee or not. The claims for deductions,
exemptions etc. are legally and factually.
If there is any omission, discrepancies, inaccuracies, etc. Then the assessing officer makes an
own assessment for the assessee by taking all facts in mind.
Type of cases
Manual scrutiny cases.
Compulsory Scrutiny cases.
Manual scrutiny cases as follows:
Not filing Income Tax Return.
State lesser income or more tax as compared to earlier year.
Mismatch in TDS credit between claim and 26AS.
Non-declaration of exempted income.
Claiming for large refunds in return of Income.
Taking double benefit due to the Job change.
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Case 3: Where specific and verifiable information pointing on tax evasion is
given to Government Department/ Authorities.
Case 4: Rejection of the approval u/s 10 (23C) of the Act or withdrawing the
approval already is passed by the authority, yet the assessee found claiming
tax exemption under the aforesaid provision of the Act.
Types
Compulsory Assessment: Assessing officer (AO) finds that there is non-
cooperation by the assessee or found to be a defaulter in supplying
information to the department.
Discretionary/optional assessment: When AO is dissatisfied with the
authenticity/validity of the accounts given by the assessee or where no regular
method of accounting has been followed by the assessee.
Cases
Case 1: If a person fails to make return u/s 139(1) and has not made a return
or a revised return under sub-section (4) or (5) of that section; or
Case 2: If any person fails to comply with all the terms of notice under section
142(1) or fails to follow directions mentioned to get account audited u/s section
142(2A); or
Case 3: If a person after filing a return fails to comply with all the terms of
notice received under section 143(2) requiring presence or production of
evidence and documents; or
Case 4: If the Assessing Officer is not satisfied with the correctness or
completeness of the accounts or documents.
Case 5: A person has a right to file an appeal u/s 246 or to craft an application
for revision u/s 264 to the commissioner.
Also keep in mind, after giving a chance to the assessee of being heard, then only best judgment
assessment can be made.
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Protective assessment
This is a type of assessments that focus on those assessments which are made to ‘protect’ the
interest of the revenue.
Though, there is no provision in the income tax act authorizing the levy of income tax on a person
other than whom the income tax is payable. It is open to the authorities to make a protective or an
alternative assessment if it is not ascertainable who is really liable to pay the tax among a few
possible persons.
For example
If there are doubts on a rental income belongs to Mr. A or Mr. B. Then, the assessing officer at his
own discretion may add the rental income to any one of them on a protective basis. This is done
ensure that finality, the owner of the income has not denied the addition of income because of
limitation of time.
In making a protective assessment, the authorities are simply making an assessment and leaving
it as a paper assessment until the matter is decided. A protective order of assessment can be
passed but not a protective order of penalty.
Objective
The objective of carrying out assessment u/s 147 is to bring them under the tax net, any income
which has escaped assessment in the original assessment.
Time limit
Completion of assessment under section 147
Under section 147, notice is issued within 9 months from the end of the financial year in
which notice u/s 148 is also served.
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Case 1: If escaped income amounts to Rs. 1, 00,000 or more and then notice can be issued for up
to 6 years from the end of the relevant assessment year.
Case 2: If escaped income is associated with any assets (including financial interest in any entity)
i.e. located outside India, and then notice can be issued up to 16 years from the end of the
relevant assessment year.
Notice u/s 148 can be issued by AO only after getting prior approval from the prescribed authority
mentioned in section 151.
Issue notice to such person requires furnishing within such period, as specified
in the notice. Clause (b) referred to the return of income of each assessment
year falling within six assessment years and is verified in prescribed form.
Setting forth such other particulars as may be prescribed and the provisions of
this Act shall, so far as may be, apply accordingly as if such return were a
return required to be furnished under section 139;
Assessor re-assess the total income of six assessment years immediately
preceding the assessment year relevant to the previous year in which such
search is conducted or requisition is made.
Note: Section 153A issues a notice for 6 years, preceding the search not for the year of search
and no return is required to be filed (for the year of search) u/s 153A. File only a regular return u/s
139.
21 months from the end of the financial year this does not include the last
authorization for search u/s 132 or requisition u/s 132A.
Similar time limits shall apply in respect of the year of search also.
As provided in above clause (a) or clause (b) or 9 months from the end of the Financial Year
where BOA/documents/assets seized/requisitioned are handed over to the assessing officer
(AO), whatever is latest.
Conclusion
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All types of income tax assessment should be taken seriously. Moreover, file the income tax return
accurately and mention all the proofs to avoid any type of income tax assessment in front of the
assessing officer.
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The Board may, by notification in the Official Gazette, direct that any income-tax authority
or authorities specified in the notification shall be subordinate to such other income-tax
authority or authorities as may be specified in such notification.
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Powers of the Income Tax Authorities vary with the nature of the position acquired. Given below are the
various tax authorities along with the powers they hold under that position.
Commissioner (Appeals):
Commissioners of Income-Tax (Appeals) are appointed by the Central Government. It is an appellate
authority vested with the following judicial powers:
a. Power regarding discovery, production of evidence etc.
b. Power to call information.
c. Power to inspect registers of companies.
d. Power to set off refunds against tax remaining payable.
e. Power to dispose of appeals.
f. Power to impose penalty.
Joint Commissioners:
Joint Commissioners are appointed by the Central Government. The main function of the authority is to
detect tax- evasion and supervise subordinate officers. Under the different provisions of the Act, the Joint
Commissioner enjoys the power to accord approval to adopt fair market value as full consideration, instruct
income tax officers, exercise powers of income tax officers, the power to call information, to inspect
registers of companies, to make any enquiry among other powers.
Income-Tax Officers:
While Income-Tax officers of Class I services are appointed by the Central Government, Income-tax
Officers of Class II services are appointed by the Commissioner of Income-Tax. Powers, functions and
duties of Income-Tax officers are provided in many sections, some of which are Power of search and
seizure, Power of assessment, Power to call for information, Power of Survey etc.
Inspectors of Income-Tax:
They are appointed by the Commissioner of Income-Tax. Inspectors of Income-Tax have to perform such
functions as are assigned to them by the Commissioner or any other authority under whom they are
appointed to work.
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THE SCOPE OF EXERCISE OF THE POWERS GIVEN TO THE INCOME-TAX AUTHORITIES:
The Income Tax Act, 1961 specifies the scope of the powers handed to the income-tax authorities. Given
below are some of the important powers of the Income Tax Authorities and their scope as given in the
Sections provided under the Income Tax Act, 1961:
The Board can also authorize Director General or Chief Commissioner or Commissioner to issue orders in
writing to the effect that the functions conferred or assigned to the Assessing Officer in respect of the above
four criteria shall be exercised or performed by Joint Commissioner or Joint Director.
Also, the Assessing Officer has been vested with jurisdiction over any area or limits of such area -
1. If a person carries on business or profession only in that area. In respect of that person; or
2. If a person carries on business or profession in more than one place, then the principal place of business or
profession situated in that area; or
3. In respect of any other person residing within that area.
Any dispute relating to jurisdiction to assess any person by an Assessing Officer shall be determined by
Director General /Chief Commissioner/Commissioner of Income Tax If the dispute is relating to areas
within the jurisdiction of different Director General /Chief Commissioner/ Commissioner, then such issue is
to be solved mutually among themselves. If the above authorities are not in agreement among themselves
such matter has to be decided by the Board or Director General/ Chief Commissioner/ Commissioner
authorized by the Board.
CONCLUSION:
It is believed that tax-authorities are independent judicial officers who are required to pass reasoned orders
based on their own reasoning un-influenced by instructions or advice from their superior officers. The
Central Excise adjudication manual published in 1988 (that was its last publication), in para 39 directed that
Board Orders and reference numbers should not be quoted in the Adjudication Orders. It was further advised
that Law Ministry’s opinion is confidential and should never be communicated in the same language to even
sub-ordinate officers. There are several Assistant Commissioners who boast “I am an adjudicating authority
and not bound by the Board orders”.
This has resulted in a considerable degree of uncertainty in financial management with respect to taxes. For
example it is hard to determine for the assesses, the binding value of circulars issued by CBDT under
Section 119 of the Income Tax Act, 1961. Also, these circulars blatantly contradict statutory provisions that
have been given binding effect, displace the authoritative pronouncements of the Higher Judiciary and cause
an erosion of the constitutionally-mandated effect of Supreme Court declarations under Article 141.
In recent times the catena of judicial pronouncements and statue provisions are creating quite a
stir. However, there is still a need to further define and redefine and implement the extent to which Income
Tax authorities are required to exercise their powers and perform their functions so as to prevent harassment
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of assesses, tax-evasion, unnecessary discrimination in collection of tax and to help assesses effectively
manage taxes.
Functions
FUNCTIONS AND STRUCTURE OF THE DEPARTMENT OF REVENUE The Department of Revenue is mainly
responsible for the following functions: -
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9. Central Excise Act, 1944 and related matters;
10.Customs Act, 1962 and related matters;
11.Central Sales Tax Act, 1956;
12.Narcotics Drugs and Psychotropic Substances Act, 1985;
13.Prevention of illicit Tariff in Narcotic Drugs and Psychotropic Substances Act, 1988;
14.Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976;
15.Indian Stamp Act, 1899 (to the extent falling within jurisdiction of the Union);
16.Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974;
17.Foreign Exchange Management Act, 1999; and
18.Prevention of Money Laundering Act, 2002.
The administration of the Acts mentioned at Sl.Nos.3, 5,6 and 7 is limited to the cases pertaining to the period
when these laws were in force.
1. Commissionerates/Directorates under Central Board of Excise and Customs;
2. Commissionerates/Directorates under Central Board of indirect Taxes and Customs;
3. Central Economic Intelligence Bureau;
4. Directorate of Enforcement;
5. Central Bureau of Narcotics;
6. Chief Controller of Factories;
7. Appellate Tribunal of Forfeited Property;
8. Income Tax Settlement Commission;
9. Customs and Central Excise Settlement Commission;
10.Customs, Excise and Service Tax Appellate Tribunal;
11.Authority for Advance Rulings for Income Tax;
12.Authority for Advance Rulings for Customs and Central Excise;
13.National Committee for Promotion of Social and Economic Welfare;
14.Competent Authorities appointed under Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976 & Narcotic Drugs and Psychotropic
Substances Act, 1985; and,
15.Financial Intelligence Unit, India (FIU-IND)
Functions of the various Divisions/Organisations in the Deptt. of Revenue. ADMINISTRATION DIVISION: All
administrative matters of Department of Revenue. Maintenance of CR Dossiers of the staff and officers of the
Secretariat proper of the Department and IRS (IT), IRS (Custom & Central Excise) of the level of Chief
Commissioners and above. SALES TAX DIVISION: Administration of sales tax laws (Validation) Act, 1956,
Central Sales Tax, State-level Value Added Tax (VAT), Indian Stamp Act, 1989 etc. NARCOTICS CONTROL
DIVISION: Framing of licensing policy for cultivation of Opium poppy, production of opium and export and pricing
of opium. Coordination of the working of Committee of Management and issues relating of UN and International
Organisations . COMMITTEE OF MANAGEMENT: Administering the departmental undertakings viz. Govt.
Opium and Alkaloid work Neemuch (M.P.) and Ghazipur which are engaged in processing of raw opium for
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export purposes and also for extraction of alkaloids from opium, which are used by the Pharmaceutical
industry. REVISION APPLICATION UNIT: Work relating to revision applications filed against the orders of
Commissioners of Customs (Appeals) and Commissioners of Central Excise (Appeals) and the cases filed
before 11.10.1982 against CBIC. INTEGRATED FINANCE UNIT: Tendering advice in all financial matters
pertaining to Department of Revenue and the field formations under CBDT & CBIC. Deals with expenditure and
financial proposals. Prepare expenditure budget for grants relating to Department of Revenue, Direct Taxes &
Indirect Taxes. CENTRAL BOARD OF indirect taxes and Customs: All matters relating to levy and collection
of indirect taxes. CENTRAL BOARD OF DIRECT TAXES: All matters relating to levy and collection of direct
taxes. COMPETENT AUTHORITIES: Administration of Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976 and issues relating to Competent Authorities and Appellate Tribunal for
Forfeited Property. APPELLATE TRIBUNAL FOR FOFEITED PROPERTY: Work relating to forfeiture of
property under Smugglers and Foreign Exchange Manipulators (Forfeiture of property) Act, 1976 and Chapter
VA of Narcotics Drugs and Psychotropic Substances Act, 1985. CUSTOMS, EXCISE, SERVICE TAX
APPELLATE TRIBUNAL: Hearing appeals against the orders of Executive Commissioners and Commissioners
(Appeals). NATIONAL COMMITTEE FOR PROMOTION OF SOCIAL AND ECONOMIC
WELFARE: Recommending projects of social and economic welfare to the Central Government for issuance of
notification under section 35 AC of the Income Tax Act, 1961. AUTHORITY FOR ADVANCE RULINGS: Giving
advance rulings on a question of law or fact specified in an application filed by Non-Residents in relation to
transaction, which has been undertaken or proposed to be undertaken by the applicant. CUSTOMS AND
CENTRAL EXCISE SETTLEMENT COMMISSION: Settlement of applications filed by the assessees under the
Customs Act and Central Excise Act. SETTLEMENT COMMISSION (IT/WT): Settlement of applications filed by
the assessees under the Income Tax Act, 1961 and the Wealth Tax Act, 1957. CENTRAL ECONOMIC
INTELLIGENCE BUREAU: Coordinating and strengthening of the intelligence gathering activities, the
investigative efforts and enforcement action by various agencies concerned with investigation into economic
offences and enforcement of economic laws. ENFORCEMENT DIRECTORATE: Responsible for enforcement of
the provision of Foreign Exchange Regulation Act. Recommending cases for detention under the Conservation
of Foreign Exchange and Prevention of Smuggling Activities Act, 1974. Under Foreign Exchange Management
Act, 1999, the Enforcement Directorate is mandated primarily as the investigation and adjudicating
agency. FINANCE INTELLIGENCE UNIT: To coordinate and strengthen collection and sharing of financial
intelligence through an effective national, regional and global network to combat money laundering and related
crimes. FINANCE MINISTER, MINISTER OF STATE(FINANCE), SECRETARY (REVENUE), Chairman (CBDT),
Chairman (CBIC), AS(R) Administration of all direct taxes enactments and rules made thereunder. For detailed
execution the Board has under it the following attached and subordinate offices:-
Administration of all indirect taxes enactments and rules made thereunder. Entrusted with
matters relating to Anti-Smuggling. For the performance of its administrative & Executive
functions the Board is assisted by the following attached and subordinate offices: -
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24.Commissioner(Review).
25.Chief Chemist, Central Revenue Control Laboratory.
26.Principal Chief Controller of Accounts.
Besides administration of the Head quarters, the Addl. Secretary (R) is entrusted with the
matters relating to the Money Laundering Act, the Indian Stamp Act, Central/State Taxes
including CST, AED,VAT, Economic Security, Opium Wing and the implementation of
Official Language Act and the Rules framed thereunder. The Department of Revenue (Main)
has under its aegis the following bodies / organizations
1. Settlement Commission(IT&WT)
2. Customs & Central Excise Settlement Commission
3. Offices of five Competent Authorities [SAFEM (FOP) Act, 1976 & NDPS Act, 1985]
4. Appellate Tribunal for Forfeited Property
5. Customs Excise & Service Tax Appellate Tribunal.
6. Enforcement Directorate
7. Authority on Advance Ruling (IT)
8. Authority on Advance Ruling (Customs & Central Excise)
9. Finance Intelligence Unit.
F.A., J.S.(R.A.), Narcotics Commissioner, Chief Controller of Opium & Alkaloid Factory Coordination &
strengthen ing of the intelligence gathering activities the Investigative efforts and enforcement action by various
agencies concerned with investigation into economic laws. The Bureau is responsible for maintaining liaison with
the concerned departments and directorates both at the Central & State Govt. level, and in addition is
responsible for the overall direction and the control of the Investigative agencies within the D/o Revenue itself.
The Bureau is also responsible for the administration of COFEPOSA Act, 1974. As Head of Economic
Intelligence Council, coordination amongst various enforcement agencies dealing with economic offences,
functions include formulation of coordinated action plan against tax evaders and black money operators, suggest
measures for dealing with various modus operandi adopted by them and advise Govt. on amendment of laws
etc. for plugging loopholes. All financial budget & expenditure matters relating to the Deptt. Including the CBIC,
CBDT & the field formations of the Department. Revision Application under Customs Act, 1962 and central
Excise and Salt Tax, 1944 (other than cases covered by (CESTAT). Superintendence & control over cultivation
of opium poppy and production of opium and prevention of diversion of opium to illicit channels Over all
administration of the Government Opium and Alkaloid works undertaking at Ghazipur and Neemuch; export of
opium and import of opiate drugs for medicinal use; sale of excise opium and opiate drugs to manufacturing
chemists within the country.
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Modes of Recovery of Tax [Section 122]
Section-122 provides that in case assessee fails to pay any sum imposed by way of interest,
fine, penalty, or any other sum payable under the provisions of this Act, the same shall be
recoverable in the manner specified in the Act for the recovery of arrears of tax.
Where a certificate has been drawn up, the Tax Recovery Officer may recover the tax by
any one or more of the modes provided in this section.
B-1 (i) Deduction from Salary
If any assessee is in receipt of any “Salaries” income, the Assessing Officer or Tax Recovery
Officer may approach such person paying salary to deduct arrears of tax from the salary of
the assessee, and such person shall comply with any such requisition and shall pay the sum
so deducted to the credit of the Central Government or as the Board directs.
But any part of the salary exempt from attachment in execution of degree of a civil court,
shall be exempt from any requisition made under this sub-section.
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3. A copy of the notice shall be forwarded to the assessee at his last address known to
the Assessing Officer or Tax Recovery Officer, and in the case of a joint account to all
the joint holders at their last addresses known to the Assessing Officer or Tax
Recovery Officer.
4. Save as otherwise provided in this sub-section, every person to whom a notice is
issued under this sub-section shall be bound to comply with such notice, and, in
particular, where any such notice is issued to a post office, banking company or an
insurer, it shall not be necessary for any pass book, deposit receipt, policy or any
other document to be produced for the purpose of any entry, endorsement or the
like being made before payment is made, notwithstanding any rule, practice or
requirement to the contrary.
5. Any claim respecting any property in relation to which a notice under this sub-
section has been issued arising after the date of the notice shall be void as against
any demand contained in the notice.
6. Where a person to whom a notice under this sub-section is sent objects to it by a
statement on oath that the sum demanded or any part thereof is not due to the
assessee or that he does not hold any money for or on account of the assessee, then
nothing contained in this sub-section shall be deemed to require such person to pay
any such sum or part thereof, as the case may be, but if it is discovered that such
statement was false in any material particular, such person shall be personally liable
to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to
the assessee on the date of the notice, or to the extent of the assessee’s liability for
any sum due under this Act, whichever is less.
7. The Assessing Officer or Tax Recovery Officer may, at any time or from time to time,
amend or revoke any notice issued under this sub-section or extend the time for
making any payment insection226 pursuance of such notice.
8. The Assessing Officer or Tax Recovery Officershall grant a receipt for any amount
paid in compliance with a notice issued under this sub-section, and the person so
paying shall be fully discharged from his liability to the assessee to the extent of the
amount so paid.
9. Any person discharging any liability to the assessee after receipt of a notice under
this sub-section shall be personally liable to the Assessing Officer or Tax Recovery
Officer to the extent of his own liability to the assessee so discharged or to the
extent of the assessee’s liability for any sum due under this Act, whichever is less.
10. If the person to whom a notice under this sub-section is sent fails to make payment
in pursuance thereof to the Assessing Officer or Tax Recovery Officer he shall be
deemed to be an assessee in default in respect of the amount specified in the notice
and further proceedings may be taken against him for the realisation of the amount
as if it were an arrear of tax due from him, in the manner provided in sections 222 to
225 and the notice shall have the same effect as an attachment of a debt by the Tax
Recovery Officer in exercise of his powers under section 222.
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B-3 (iii) Application to Court for payment of money in court’s
custody [ Sec. 226(4)]
The Assessing Officer or Tax Recovery Officer may apply to the court in whose custody
there is money belonging to the assessee for payment to him of the entire amount of such
money, or, if it is more than the tax due, an amount sufficient to discharge the tax.
ELECTRONIC FILING
The process of electronically filing Income tax Returns/Forms through the internet is known as e-Filing.
e-Filing of Returns/Forms is mandatory for
1. In the case of an Individual/HUF
Where accounts are required to be audited under section 44AB;
Where the above is not applicable and
The return is furnished in ITR - 3 or in ITR - 4; or
The individual/HUF being a resident (other than not ordinarily resident) has Assets, including
financial interest in any entity, located outside India, or signing authority in any account
located outside India, or income from any source outside India;
Any relief in respect of tax paid outside India under section 90 or 90A or deduction under
section 91 is claimed.
Where an assessee is required to furnish an Audit Report specified under sections 10(23C)
(iv), 10(23C) (v), 10(23C) (vi), 10(23C) (via), 10A, 10AA, 12A(1) (b), 44AB, 44DA, 50B, 80 -
IA, 80 - IB, 80 - IC, 80 - ID, 80JJAA, 80LA, 92E, 115JB, 115VW or give a notice under section
11(2)(a) shall e-File the same. These Audit Reports are to be e-Filed and any person required
to obtain these Audit Reports are required to e - File the return.
Total income exceeds five lakh rupees or any refund is claimed (other than Super Senior
Citizen furnishing ITR1 or ITR2)
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In cases where accounts are required to be audited under section 44AB, the return is required
to be e-Filed under digital signature (DSC).
In cases where accounts are not required to be audited under section 44AB, the return is
required to be e - Filed using any one of the three manners namely i) Digital Signature
Certificate (DSC) or ii) Electronic Verifi cation Code (EVC), or iii) Verification of the return in
Form ITR - V.
2. In all cases of company the return is required to be e-Filed under digital signature (DSC)
3. In the case of a person required to file ITR - 7:
For a political party the return is required to be e - Filed under digital signature (DSC)
In any other case of ITR 7, the return is required to be e-Filed using any one of the three
manners namely i) DSC or ii) EVC or iii) ITR V D.
4. In case of Firm or Limited Liability Partnership or any person (other than a person mentioned in 1, 2 &
3 above) who are required to file return in Form ITR - 5
Where accounts are required to be audited under section 44AB, the return is required to be e
- Filed under digital signature (DSC)
In any other case the return is required to be e - Filed using any one of the three manners
namely i) DSC or ii) EVC or iii) ITR V.
5. A company and an assessee being individual or HUF who is liable to audit u/s 44AB are required to
furnish Form BB (Return of Net Wealth) electronically using DSC.
6. Information to be furnished for payments, chargeable to tax, to a non - resident not being a company,
or to a foreign company in Form 15CA.
7. Appeal to the Commissioner (Appeals) in Form 35.
Types of e-Filing
There are three ways to file Income Tax Returns electronically:
1. Option 1 - Use Digital Signature Certificate (DSC) to e-File. There is no further action
needed, if filed with a DSC.
2. Option 2 - e-File without Digital Signature Certificate. In this case an ITR-V Form is
generated. The Form should be printed, signed and submitted to CPC, Bangalore using
Ordinary Post or Speed Post (without Acknowledgement) ONLY within 120 days
from the date of e-Filing. There is no further action needed, if ITR-V Form is
submitted.
3. Option 3 - e-File the Income Tax Return through an e-Return Intermediary (ERI) with
or without Digital Signature Certificate (DSC).
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What is Income Tax Refund?
Income tax refund is a process by which the Income Tax Department returns any excess
tax paid by a taxpayer during a particular financial year (FY). This happens when the
amount of tax paid by a taxpayer is more than his/her actual tax liability for that
particular FY. The excess tax can be claimed as an income tax refund under Section 237
of the Income Tax Act, 1961. The amount of income tax refund claimed by a taxpayer by
filing ITR is subject to verification by the Income Tax Department.
You did not furnish all the investment proofs to your organization. As a result, the
amount of taxes deducted by your employer exceeded your actual tax liability for
the particular FY.
Excess TDS was deducted on your interest income from bank FDs or bonds.
The advance tax paid by you on self-assessment exceeded your tax liability for the
applicable FY as per the regular assessment.
In case of double taxation, for example – when a person is a citizen of one country
but derives income from another country. However, there are a few countries with
which India has Double Taxation Avoidance Agreement (DTAA). This means you
can claim a tax refund if you are a non-resident Indian working in a foreign country
with which India has DTAA. For example, you hold a non-resident ordinary (NRO)
deposit in an Indian bank. The interest earned on such deposits shall be taxed as
per the applicable slab rate. However, if you qualify to be a tax resident of the
foreign country where you reside, you may claim a tax refund for the TDS deducted
on interests earned in India on your NRO deposit.
Earlier Income Tax Form 30 was required to claim an income tax refund. However, with
the advent of e-transfer of refunds, it can now be claimed by simply filing the ITR. The
ITR should further be verified, either physically or electronically within 120 days of filing.
Please note that the excess tax for which a refund is claimed should be reflected in Form
26AS. Moreover, the refund is subject to verification by the Income Tax Department. It is
credited only if the refund claim is found to be valid by the department.
Income Tax Refund status can be checked from either of the following:
As the entire process of claiming a refund depends on the submission of ITR, the time
limit for the claiming an IT refund is the same. For any assessment year, the time period
for filing your returns and claiming a refund is the end of the assessment year. Thus, for
AY 2019-20, the last date to claim an income tax refund is 31st March 2020, the last date
for delayed filing of ITR for FY 2018-19.
Under Section 238 of the Income Tax Act, 1961, if a person is unable to claim tax
refund due to death, insolvency, incapacity, liquidation or any other cause, then his
legal representative, trustee, guardian, or receiver can claim the refund on his/her
behalf.
Moreover, if a person’s income is included in the total income of any other person,
then the latter can claim income tax refund for such income. For example, a
parent/guardian can claim refund on behalf of minor child if, the minor’s income is
added to that of the parent or guardian.
When refund of any amount is due to a taxpayer as a result of any order passed in
response to an appeal, then the refund amount will be credited without making a claim
for such a refund. In other words, there is no requirement for the tax assessee to place
any additional request for refund from the taxpayer’s side in such cases. It should be
noted that if the assessment was canceled with a direction to make a fresh assessment,
the refund shall become due only after making the fresh assessment.
An interest is compulsorily paid by the Income Tax Department, if the amount of refund
is 10% or more of the total tax paid. As per Section 244A of the Income Tax Act, simple
interest at the rate of 0.5% per month or part of the month on the amount of tax refund
is paid.
The interest is calculated from 1st April of the applicable assessment year till the date of
refund, if the return of income is furnished on or before the due date of ITR filing. While
in cases of delayed income tax filing, the interest on the refund amount is calculated from
the date of furnishing return to the date on which refund is granted.
E-file your returns before the due date for speedy processing of income tax refund.
Ensure that the amount of excess tax paid by you is also reflected in Form 26AS.
Ensure that the details of bank account mentioned at the time of ITR filing are
correct to prevent any delay in the credit of the tax refund amount. In case you
furnish incorrect details, “Refund Unpaid” will be displayed as the income tax return
status.
Timely review the income tax refund status to take the applicable corrective
measures, if any.
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♣ Fees for filing appeal
Where total Income / loss computed by AO is Rs. 1 lakh or below – Rs. 250
Where total Income / loss computed by AO exceed Rs. 1 lakh but below Rs. 2 lakh – Rs.
500
Where total Income / loss computed by AO exceeds Rs. 2 Lakh – Rs. 1000
Any matter not specified in three above – Rs. 250
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♣ to be heard by not less than two judges bench
♣ High Court has power to recall its order – if sufficient cause is shown and fact that the
♣ order was passed on merits makes no difference
♣ High court cannot determine issue not raised before ITAT (CIT vs. Air India Ld.)
Fourth & last appeal To Supreme Court( SC)- writ petition u/s 261
♣ By Assessee / department
♣ Only if high court certifies the case to be fit for appeal to SC, however aggrieved party may
make an application under article 136 for special leave
♣ SC decisions are binding for non-appellants as well. Law declared by SC is binding on all Courts
and Tribunals in view of article 141 of constitution.
♣ If department has not challenged the correctness of the law laid down by the High Court and has
accepted it in case of one assesse, then it is not open to the department to challenge the
correctness in case of other assessees without just cause.
Revision
Revision by the Principal Commissioner or commissioner – u/s 263
by CIT himself if order is prejudicial to the interest of revenue
♣ May call for and examine the record of any proceeding under the Act, and if he consider that any
order passed therein by the AO is erroneous in so far as it is prejudicial to the interest of revenue.
♣ Can modify, cancel or direct fresh assessment
♣ Opportunity of being heard to assessee is must
♣ Time limit: cannot revise AO order after the expiry of 2 years from the end of financial year in
which the order sought to be revised was passed.
♣ Revision order should be speaking order
♣ Order for which revision is taken up should be in existence and served.
Revision by the Principal Commissioner or commissioner – u/s 264
On application of assess or Suo motu by CIT, provided revision is in favour of assessee
♣ Revision of orders not covered under section 263
♣ Shall not revise any order under this section in the following cases:
a) Suo motu, Where the order has been made more than one year previously
b) On application of assesse, where application has been made after one year from the
date of order communicated or came to his knowledge, whichever is earlier
c) Where appeal has been filed to CIT( appeals)
d) Where appeal is not filed but the time to file appeal has not expired
♣ Time limit: shall pass an order within one year from the end of the financial year in which the
application is filed by the assesse. But no time limit in cases where order is to be passed to give
effect to any finding / direction contained in any order of the Appellate tribunal, National Tax
Tribunal, High Court or the Supreme Court.
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♣ Revision order should be speaking order
♣ No appeal can be filed against such orders under Income Tax Act, However writ under Article
226/227 is possible.
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Section 263: The Principal Commissioner or Commissioner may call for and examine the record
of any proceeding under this Act, and if he considers that any order passed therein by the
Assessing officer is erroneous in so far as it is
prejudicial to the interests of the revenue, he may after giving an opportunity of being heard pass
such order thereon as the circumstances of the case justify, including an order enhancing or
modifying the assessment, or cancelling the assessment and directing a fresh assessment .
However, Assessee has an option to file an appeal in INCOME TAX APPELLATE TRIBUNAL
against the revision order passed by CIT u/s 263.
Section 264: The Principal Commissioner or Commissioner may, either of his own motion or on
an application by the assessee for revision, call for the record of any proceeding under this act in
which any such order has been passed and may make such inquiry or cause such inquiry to be
made and subject to the provisions of this act, may pass such order thereon, not being an order
prejudicial to the assessee, as he thinks fit.
However, In this case income tax act does not provide any remedy for filling appeal to higher
income tax authority. But , assessee has an option , he can take the benefit of Constitution of
India. Article 226 provides every citizen of india remedy to file WRIT petition in High Court against
the order passed by income tax department.
APPEALS
As already discussed in above mentioned intro, the first appeal against the order of Assessing
Officer shall lie to the Commissioner (Appeals) and it can only be filed by assesse only.
An assesse or any deductor or any collector who has been aggrieved by the orders (like order
passed under section 147, 144, 143(3) etc) passed by the certain income tax authorities can file its
first appeal to commissioner appeals u/s 246A of the income tax, act 1961.
Form of Appeal and limitation ( section 249 and Rules 45 & 46 )
1. Form : An appeal to the commissioner ( appeals) shall be made in Form 35.
2. Manner of furnishing the appeal:
a. By furnishing the form electronically under digital signature, if the return of income is
furnished under digital signature.
b. By furnishing the form electronically through electronic verification code in a case not
covered under sub clause (a)
c. In case where the assessee has the option to furnish the return of income in paper form,
he can exercise both options of filing form in paper form or electronically.
Time limit for filing the form [section 249(2)]
The appeal should be filed within a period of 30 days of date of service of notice of demand or
order passed by the authority. Further Commissioner may admit an appeal after the expiration of
the prescribed period of 30 days, if he is satisfied that the appellant had sufficient cause for not
presenting it within the prescribed period.
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A timely and consistent paying of taxes and filing of returns ensures the government has money
for public welfare at any point of time. To make sure that taxpayer does not default in paying taxes
or disclosing the information, there are several penalties prescribed under the Act.
A penalty a punishment imposed on the taxpayer for being non-compliant. Listed below is a
summary of some of the important and most common penalties.
2. Under-reporting of income
If the income assessed/ re-assessed exceeds the income declared by the
assessee, or in cases where return has not been filed and income exceeds the
basic exemption limit, penalty at 50% of tax payable on such under reported
income shall be levied.
4. Undisclosed income
Where the income determined includes undisclosed income, a
penalty @10% is payable. However, no such penalty will be leviable, if such
income was included in the return and tax was paid before the end of the
relevant previous year.
Where Search has been initiated on/ after 1/7/2012 but before 15/12/2016,
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a. If undisclosed income is admitted during the course of search and assessee pays tax and
interest and files return, a penalty @ 10% of such undisclosed income is payable.
b. If undisclosed income is not admitted but the same is furnished in the return filed after such
search, 20% of such undisclosed income is payable.
c. In all other cases, penalty is leviable @ 60%
a. If undisclosed income is admitted during the course of Search and assessee pays tax and
interest and files return, a penalty @ 30% of such undisclosed income is payable.
b. In all other cases, penalty is leviable @ 60%
6. TDS/TCS
o Where a person fails to deduct tax at source, he will be liable to pay a
penalty equal to the amount of tax which he has failed to deduct/ pay.
If a person repays loan/ deposit and such amount so repaid exceeds ₹20,000 and such amount
has been repaid except by way of Account payee cheque/ account payee draft/ ECS, an
amount equal to such loan/ deposit shall be payable.
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Period of delay Penalty
9. Others
Failure to apply/quote/ intimate PAN/ quoting false PAN shall attract a penalty
of ₹10,000
UNIT III
INDIRECT TAX REGIME
CONCEPT OF GOODS AND SERVICE TAX (GST) - THE CONSTITUTION (122nd
AMENDMENT) ACT 2017. THE CENTRAL GOODS AND SERVICES TAX ACT
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2017 - DUAL GST MODEL TAXATION - GST COUNCIL - CENTRAL GST (CGST);
GST LEVY ON TRANSACTIONS - SALE, TRANSFER, PURCHASE, BARTER,
LEASE, OR IMPORT OF GOODS AND/OR SERVICES. IGST/SGST/UTGST -
COMPENSATION LAW TO STATE GOVERNMENTS GSTN - GST NETWORK
PORTAL; TAX INVOICE, GST ON IMPORTS AND EXPORTS, BENEFITS OF
GST TO TRADE, INDUSTRY, E-COMMERCE AND SERVICE SECTOR AND THE
CONSUMERS AT LARGE, IMPACT OF GST ON GDP OF INDIA AND
INFLATION.
GST Regime:
GST is one of the biggest indirect tax reforms in the country. GST is expected to bring together
state economies and improve overall economic growth of the nation.
GST is a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as
services at the national level. It will replace all indirect taxes levied on goods and services by states
and Central.
There are around 160 countries in the world that have GST in place. GST is a destination based
taxed where the tax is collected by the State where goods are consumed. India is going to
implement the GST from July 1, 2017 and it has adopted the Dual GST model in which both States
and Central levies tax on Goods or Services or both.
SGST – State GST, collected by the State Govt.
CGST – Central GST, collected by the Central Govt.
IGST – Integrated GST, collected by the Central Govt.
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VAT rates and regulations differ from state to state. On the other hand, GST brings in uniform tax
system across all the states. Here, the taxes would be divided between the Central and State
government.
Benefits of GST:
To trade To Consumers
· Reduction in · Simpler Tax system · Create unified common
multiplicity of taxes national market for
India, giving a boost to
Foreign investment and
“Make in India”
campaign
· Mitigation of · Reduction in prices of · Boost export and
cascading/ double goods & services due to manufacturing activity
taxation elimination of cascading and leading to
substantive economic
growth
· More efficient · Uniform prices · Help in poverty
neutralization of taxes throughout the country eradication by generating
especially for exports more employment
· Development of · Transparency in · Uniform SGST and
common national market taxation system IGST rates to reduce the
incentive for tax evasion
· Simpler tax regime · Increase in
employment
opportunities
· Fewer rates and
exemptions
· Distinction between
Goods & Services no
longer required
· More efficient neutralization of taxes especially for exports thereby making our products more
competitive in the international market and give boost to Indian Exports.
· Improve the overall investment climate in the country which will naturally benefit the
development in the states.
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· Average tax burden on companies is likely to come down which is expected to reduce prices and
lower prices mean more consumption, which in turn means more production thereby helping in
the growth of the industries . This will create India as a “Manufacturing hub”.
· Will improve environment of compliance as all returns to be filed online, input credits to be
verified online, encouraging more paper trail of transactions.
· Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax
return, common tax base, common system of classification of goods and services will lend
greater certainty to taxation system.
· Timelines to be provided for important activities like obtaining registration, refunds, etc.
· GST will be beneficial with more transparency, efficient compliance, ramp up in GDP growth to
the Centre, states, industrialists, manufacturers, the common man and the country at large.
Conclusion
GST will bring in transparent and corruption-free tax administration, removing the
current shortcomings in indirect tax structure. GST is business friendly as well as
consumer friendly.GST in India is poised to drastically improve the positions of each
of these stakeholders.We need a change in the taxation system which is better than
earlier taxation. This need for change leads us to ‘need for GST’.
GST will allow India to better negotiate its terms in the international trade
forums.GST aimed at increasing the taxpayer base by bringing SMEs and the
unorganized sector under its compliance. This will make the Indian market more
stable than before and Indian companies can compete with foreign companies.
1. What is GST?
GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service
Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July
2017; Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based
tax that is levied on every value addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods
and services. This law has replaced many indirect tax laws that previously existed in India.
GST is one indirect tax for the entire country.
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So, before Goods and Service Tax, the pattern of tax levy was as follows:
Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales,
Central GST and State GST are charged. Inter-state sales are chargeable to Integrated GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is
a comprehensive, multi-stage, destination-based tax that is levied on every value addition.”
Multi-stage
There are multiple change-of-hands an item goes through along its supply chain: from
manufacture to final sale to the consumer.
Let us consider the following case:
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Goods and
Services Tax is levied on each of these stages which makes it a multi-stage tax.
Value Addition
The manufacturer who makes biscuits buys flour, sugar and other material. The
value of the inputs increases when the sugar and flour are mixed and baked into
biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs large quantities of
biscuits and labels it. That is another addition of value after which the warehouse sells it to the
retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits
thus increasing its value.
GST is levied on these value additions i.e. the monetary value added at each stage to achieve the
final sale to the end customer.
Destination-Based
Consider goods manufactured in Maharashtra and are sold to the final consumer in Karnataka.
Since Goods & Service Tax is levied at the point of consumption. So, the entire tax revenue will go
to Karnataka and not Maharashtra.
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2. Journey of GST in India
The GST journey began in the year 2000 when a committee was set up to draft law.
It took 17 years from then for the Law to evolve. In 2017 the GST Bill was passed in
the Lok Sabha and Rajya Sabha. On 1st July 2017 the GST Law came into force.
3. Advantages Of GST
GST has mainly removed the Cascading effect on the sale of goods and services.
Removal of cascading effect has impacted the cost of goods. Since the GST regime
eliminates the tax on tax, the cost of goods decreases. GST is also mainly
technologically driven. All activities like registration, return filing, application for
refund and response to notice needs to be done online on the GST Portal; this
accelerates the processes.
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SGST: Collected by the State Government on an intra-state sale (Eg:
transaction happening within Maharashtra)
IGST: Collected by the Central Government for inter-state sale (Eg:
Maharashtra to Tamil Nadu)
In most cases, the tax structure under the new regime will be as follows:
Sale to IGST Central Sales Tax There will only be one type of tax
another State + Excise/Service (central) in case of inter-state sales.
Tax The Centre will then share the
IGST revenue based on the
destination of goods.
Illustration:
Let us assume that a dealer in Gujarat had sold the goods to a dealer
in Punjab worth Rs. 50,000. The tax rate is 18% comprising of only IGST.
In such case, the dealer has to charge Rs. 9,000 as IGST. This revenue will go to
the Central Government.
The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The
GST rate on the good is 12%. This rate comprises of CGST at 6% and SGST
at 6%.
The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the Central
Government and Rs. 3,000 will go to the Gujarat government as the sale is within the state.
CGST, SGST, and IGST has replaced all the above taxes. However, the
chargeability of CST for Inter-state purchase at a concessional rate of 2%, by issue
and utilisation of c-Form is still prevalent for certain Non-GST goods such as: (i)
Petroleum crude; (ii) High-speed diesel; (iii) Motor spirit (commonly known as
petrol); (iv) Natural gas; (v) Aviation turbine fuel; and (vi) Alcoholic liquor for human
consumption. in respect of following transactions only:
Resale
Use in manufacturing or processing
Use in the telecommunication network or in mining or in the generation or
distribution of electricity or any other power
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Illustration:
Based on the above example of biscuit manufacturer along with some numbers, let’s
see what happens to the cost of goods and the taxes in the earlier and GST
regimes. Tax calculations in earlier regime:
Along the way, the tax liability was passed on at every stage of the transaction and
the final liability comes to rest with the customer. This is called the Cascading
Effect of Taxes where a tax is paid on tax and the value of the item keeps
increasing every time this happens. Tax calculations in current regime:
In the case of Goods and Services Tax, there is a way to claim credit for tax paid in
acquiring input. What happens in this case is, the individual who has paid a tax
already can claim credit for this tax when he submits his taxes. In the end, every
time an individual is able to claim the input tax credit, the sale price is reduced and
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the cost price for the buyer is reduced because of lower tax liability. The final value
of the biscuits is therefore reduced from Rs. 2,244 to Rs. 1,980, thus reducing the
tax burden on the final customer. GST regime also brought a centralised system of
waybills by the introduction of “E-way bills”. This system was launched on 1st April
2018 for Inter-state movement of goods and on 15th April 2018 for intra-state
movement of goods in a staggered manner. Under the e-way bill system,
manufacturers, traders & transporters are now able to generate e-way bills for the
goods transported from the place of its origin to its destination on a common portal
with ease. Tax authorities are also benefitted as this system has reduced time at
check -posts and help reduce tax evasion.
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• It is proposed to do away with the concept of ‘declared goods of special importance’ under the
Constitution.
• Centre will compensate States for loss of revenue arising on account of implementation of the
GST for a period up to five years. A provision in this regard has been made in the Amendment Bill
(The compensation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth
year and 50% in the fifth year).
The proposed GST has been designed keeping in mind the federal structure enshrined in the
Constitution and will have the following important features:
• Central taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional
Customs Duty (CVD) and Special Additional Duty of Customs (SAD), etc. will be subsumed in
GST.
• At the State level, taxes like VAT/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and
Entry Tax, Purchase Tax and Luxury Tax, etc. would be subsumed in GST.
• All goods and services, except alcoholic liquor for human consumption, will be brought under the
purview of GST. Petroleum and petroleum products have also been Constitutionally brought under
GST. However, it has also been provided that petroleum and petroleum products shall not be
subject to the levy of GST till notified at a future date on the recommendation of the GST Council.
The present taxes levied by the States and the Centre on petroleum and petroleum products, i.e.,
Sales Tax/VAT, CST and Excise duty only, will continue to be levied in the interim period.
• Both Centre and States will simultaneously levy GST across the value chain. Centre would levy
and collect Central Goods and Services Tax (CGST), and States would levy and collect the State
Goods and Services Tax (SGST) on all transactions within a State.
• The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-
State supply of goods and services. There will be seamless flow of input tax credit from one State
to another. Proceeds of IGST will be apportioned among the States.
• GST is a destination-based tax. All SGST on the final product will ordinarily accrue to the
consuming State.
• GST rates will be uniform across the country. However, to give some fiscal autonomy to the
States and Centre, there will a provision of a narrow tax band over and above the floor rates of
CGST and SGST.
• It is proposed to levy a non-vatable additional tax of not more than 1% on supply of goods in the
course of inter-State trade or commerce. This tax will be for a period not exceeding 2 years, or
further such period as recommended by the GST Council. This additional tax on supply of goods
shall be assigned to the States from where such supplies originate.
Highlights of the Bill
The Bill amends the Constitution to introduce the goods and services tax (GST).
Parliament and state legislatures will have concurrent powers to make laws on GST. Only the centre
may levy an integrated GST (IGST) on the interstate supply of goods and services, and imports.
Alcohol for human consumption has been exempted from the purview of GST. GST will apply to
five petroleum products at a later date.
The GST Council will recommend rates of tax, period of levy of additional tax, principles of supply,
special provisions to certain states etc. The GST Council will consist of the Union Finance Minister,
Union Minister of State for Revenue, and state Finance Ministers.
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The Bill empowers the centre to impose an additional tax of up to 1%, on the inter-state supply of
goods for two years or more. This tax will accrue to states from where the supply originates.
Parliament may, by law, provide compensation to states for any loss of revenue from the introduction
of GST, up to a five year period.
An ideal GST regime intends to create a harmonised system of taxation by subsuming all indirect
taxes under one tax. It seeks to address challenges with the current indirect tax regime by
broadening the tax base, eliminating cascading of taxes, increasing compliance, and reducing
economic distortions caused by inter-state variations in taxes.
The provisions of this Bill do not fully conform to an ideal GST regime. Deferring the levy of GST
on five petroleum products could lead to cascading of taxes.
The additional 1% tax levied on goods that are transported across states dilutes the objective of
creating a harmonised national market for goods and services. Inter-state trade of a good would be
more expensive than intra-state trade, with the burden being borne by retail consumers. Further,
cascading of taxes will continue.
The Bill permits the centre to levy and collect GST in the course of inter-state trade and commerce.
Instead, some experts have recommended a modified bank model for inter-state transactions to ease
tax compliance and administrative burden.
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8. Registration: Every person who makes supply of goods and services and whose turnover exceeds
Rs 20 lakh will have to register in every state where he conducts business. The turnover
threshold is Rs 10 lakh for special category states.
9. Returns: Every taxpayer would have to self-assess and file tax returns on a monthly basis by
submitting: (i) details of supplies provided, (ii) details of supplies received, and (iii) payment of
tax. In addition to the monthly returns, an annual return will have to be filed by each taxpayer.
10. Refunds and welfare fund: Any taxpayer may apply for refund of taxes in cases including: (i)
payment of taxes in excess, or (ii) unutilized input tax credit. Upon such application, the refund
may be credited to the taxpayer, or to a Consumer Welfare Fund. The Fund will be used for the
purpose of consumer welfare.
11. Prosecution and appeals: For offences such as mis-reporting of: (i) goods and services supplied,
or (ii) details furnished in invoices, a person may be fined, imprisoned, or both by the CGST
Commissioner. Such orders can be appealed before the Goods and Services Tax Appellate
Tribunal, and further before the High Court.
12. Transition to the new regime: Taxpayers with unutilised input tax credit obtained under the
current laws such as CENVAT may utilise it under GST. In addition, businesses may also avail
input tax credit on stock purchased before the start of implementation of GST.
13. Anti-profiteering measure: The central government may by law set up an authority or designate
an existing authority to examine if reduction in tax rate has resulted in commensurate reduction
in prices of goods and services. The powers of the authority will be prescribed by the
government.
14. Compliance rating: Every taxpayer shall be assigned a GST compliance rating score based on his
record of compliance with the provisions of this Bill. The compliance rating score will be
updated at periodic intervals and be placed in the public domain.
In India both Centre and State have been assigned the powers to levy and collect taxes through
appropriate legislation. Both the Centre and State Government have distinct responsibilities to
perform according to the division of powers as prescribed in the Constitution that needs resources
for implementation. A dual GST is therefore, is appropriately aligned with the Constitutional
requirement of fiscal federalism.
GST shall have two components one levied by the Centre (referred to as Central GST), and the other
levied by the States (referred to as State GST)
Central GST and the State GST would be applicable to all transactions of goods and services
Central GST and State GST are to be paid to the accounts of the Centre and the States individually
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Central GST and State GST are to be treated individually, therefore taxes paid against the Central GST
shall be allowed to be taken as input tax credit (ITC)
Cross utilization of ITC between the Central GST and the State GST would not be permitted except in
the case of inter-State supply of goods and services Cross utilization of ITC between the Central GST
and the State GST would not be permitted except in the case of inter-State supply of goods and services
Credit accumulation on account of refund of GST should be avoided by both the Centre and the States
except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax
etc.
Uniform procedure for collection of both Central GST and State GST would be prescribed in the
respective legislation for Central GST and State GST.
Composition/Compounding Scheme for the purpose of GST should have an upper ceiling on gross
annual turnover and a floor tax rate with respect to gross annual turnover.
The taxpayer would need to submit periodical returns, in common format as far as possible, to both the
Central GST authority and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 14/15 digits
Dual GST:- Many countries in the world have a single unified GST system i.e. a single tax
applicable throughout the country. However, in federal countries like Brazil and Canada, a dual
GST system is prevalent whereby GST is levied by both the federal and state or provincial
governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax
(CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every
transaction of supply of goods and services.
Impact on Prices of Goods and Services:-The GST is expected to foster increased efficiencies
in the economic system thereby lowering the cost of supply of goods and services. Further, in the
Indian context, there is an expectation that the aggregate incidence of the dual GST will be lower
than the present incidence of the multiple indirect taxes in force. Consequently, the
implementation of the GST is expected to bring about, if not in the near term but in the medium to
long term, a reduction in the prices of goods and services. The expectation is that the dealers
would start passing on the benefit of the reduced tax incidence to the customers by way of
reduced prices. As regards services, it could be that their short term prices would go up given the
expectation of an increase in the tax rate from the present 10% to approximately 14% to 16%.
Benefits of Dual GST: – The Dual GST is expected to be a simple and transparent tax with one
or two CGST and SGST rates. The dual GST is expected to result in:-
reduction in the number of taxes at the Central and State level
decrease in effective tax rate for many goods
removal of the current cascading effect of taxes
reduction of transaction costs of the taxpayers through simplified tax compliance
increased tax collections due to wider tax base and better compliance
Separate enactments for the Central and State GST:-There will be separate
enactments. The CGST will be a common code throughout India. Further, each
State will legislate its own enactment to levy and collect the SGST. However, it is
understood that a white paper will be released by the Federal
Government/Empowered Committee of State Finance Ministers based on which
each State will legislate. The expectation is therefore is that a majority of the
provisions will be uniform across the States.
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GST COUNCIL
A single common “Goods and Services Tax (GST)” was proposed and given a go-ahead in 1999
during a meeting between the Prime Minister Atal Bihari Vajpayee and his economic advisory
panel. Mr Vajpayee set up a committee headed by the then finance minister of West Bengal, Asim
Dasgupta to design a GST model.
Later, Finance Minister P Chidambaram in February 2006 continued work on the same. It finally
was implemented on July 1st, 2017 to be a comprehensive, destination-based indirect tax that has
replaced various indirect taxes that were implemented by the State and Centre such as VAT,
excise duty, and others. The government of India also formed a GST Council to govern the
rules the Goods and Services Tax.
Why do we need a GST Council?
The GST council is the key decision-making body that will take all important decisions regarding
the GST. The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and
tax deadlines, keeping in mind special rates and provisions for some states. The predominant
responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services
across the nation
How is the GST Council structured?
The Goods and Services Tax (GST) is governed by the GST Council. Article 279 (1) of the
amended Indian Constitution states that the GST Council has to be constituted by the President
within 60 days of the commencement of the Article 279A.
According to the article, GST Council will be a joint forum for the Centre and the States. It consists
of the following members:
Place of Supply
Threshold limits
GST rates on goods and services
Special rates for raising additional resources during a natural calamity or
disaster
Special GST rates for certain States
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GST Council office is set up in New Delhi
Revenue Secretary is appointed as the Ex-officio Secretary to the GST
Council
Central Board of Excise and Customs (CBEC) is included as the chairperson
as a permanent invitee (non-voting) to all proceedings of the GST Council
Create a post for Additional Secretary to the GST Council
Create four posts of commissioner in the GST Council Secretariat (This is at
the level of Joint Secretary)
GST Council Secretariat will have officers taken on deputation from both the
Central and State Governments
The cabinet also provides funds for meetings the expenses (recurring and nonrecurring) of the
GST Council Secretariat. This cost is completely borne by the Central government.
The GST Council meets to discuss and lay GST laws that will benefit dealers across the nation.
The outcome of the previous latest GST Council meet was that the Council decided to implement
GST provisions on e-way bills that requires goods of more than Rs.50,000 in value to be
registered online before they can be moved. They have also extended the deadline to file GSTR-1.
The Council will also set up anti-profiteering screening committees that will make the National
Anti-Profiteering Authority stronger under the GST law.
Other than laying GST laws, the GST Council have taken decisions as such:
The threshold limit for exemption of GST would be set at Rs.20 lakh per year for all States
(except for special category states)
The threshold for special States is set at Rs 10 lakh per year
For composition scheme is set at Rs. 75 lakh for all States (except for the North East States
and Himachal Pradesh – Set at Rs 50 lakh per year)
Ice cream, tobacco, pan masala, and other edible ice manufacturers shall not be eligible for
composition levy (except for restaurant services)
GST Council also looks into drafting GST rules on registration, payment, valuation, input tax credit,
composition, return, refund and invoice, and transitional provisions, among other things.
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in Section 8 of the GST Act that the taxes be levied on all Intra-State supplies of goods and/or
services but the rate of tax shall not be exceeding 14%, each.
Similarly, the State Governments levied taxes on retail sales in the form of value added tax, entry of goods in the
State in the form of entry tax, luxury tax and purchase tax, etc. Accordingly, there is multiplicity of taxes which
are being levied on the same supply chain.
cascading of taxes as taxes levied by the Central Government are not available as set off against the taxes
being levied by the State Governments;
certain taxes levied by State Governments are not allowed as set off for payment of other taxes being levied
by them ;
the variety of Value Added Tax Laws in the country with disparate tax rates and dissimilar tax practices
divides the country into separate economic spheres; and
the creation of tariff and non-tariff barriers such as octroi, entry tax, check posts, etc., hinder the free flow of
trade throughout the country. Besides that, the large number of taxes results in high cost of compliance for the
taxpayers in the form of number of returns, payments, etc.
In view of the aforesaid difficulties, all the above mentioned taxes are subsumed in a single tax called the goods
and services tax which will be levied on supplies which includes goods and services at each stage of supply
chain starting from manufacture or import and till the last retail level.
So any tax which were levied by the Central Government or the State Governments on the supply of goods or
services has now been converged in goods and services tax, which is a dual levy where the Central Government
will levy and collect tax in the form of central goods and services tax (CGST Act 2017) and the State
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Government will levy and collect tax in the form of state goods and services tax (SGST Act 2017) on intra-State
supply of goods or services or both.
Levy and collection of Central/ State Goods and Services Tax [Section 8]
I. General levy of tax Section 8(1) says that there shall be levied a tax called the
Central/State Goods and Services Tax (CGST/SGST) on all intra-State supplies of goods
and/or services on the value determined under section 15 and at such rates as may be notified
by the Central/ State Government in this behalf, but not exceeding 14%, on the
recommendation of the Council and collected in such manner as may be prescribed.
II. Payment of tax Section 8(2) says that CGST/SGST shall be paid by every taxable person
in accordance with the provisions of this Act.
III. Tax on Reverse charge Section 8(3) says that the Central or a State Government may, on
the recommendation of the Council, by notification, specify categories of supply of goods
and/or services the tax on which is payable on reverse charge basis and the tax thereon shall
be paid by the recipient of such goods and/or services and all the provisions of this Act shall
apply to such person as if he is the person liable for paying the tax in relation to the supply of
such goods and/or services.
IV. Tax to be paid by the electronic commerce operator Section 8(4) says that the Central or
a State Government may, on the recommendation of the Council, by notification, specify
categories of services the tax on which shall be paid by the electronic commerce operator if
such services are supplied through it, and all the provisions of this Act shall apply to such
electronic commerce operator as if he is the person liable for paying the tax in relation to the
supply of such services. First proviso to section 8(4) says that where an electronic commerce
operator does not have a physical presence in the taxable territory, any person representing
such electronic commerce operator for any purpose in the taxable territory shall be liable to
pay tax. Second proviso to section 8(4) says that where an electronic commerce operator
does not have a physical presence in the taxable territory and also he does not have a
representative in the said territory, such electronic commerce operator shall appoint a person
in the taxable territory for the purpose of paying tax and such person shall be liable to pay
tax.
I. Conditions for composition scheme Section 9(1) says that in spite of anything to the
contrary contained in the Act but subject to section 8(3), on the recommendation of the
Council, the proper officer of the Central or a State Government may, subject to such
conditions and restrictions as may be prescribed, permit a registered taxable person, whose
aggregate turnover in the preceding financial year did not exceed Rs. 50 lakhs, to pay, in lieu
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of the tax payable by him, an amount calculated at such rate as may be prescribed, but not
less than 2.5% in case of a manufacturer and 1% in any other case, of the turnover in a State
during the year
II. Composition scheme not available in certain situations The first proviso to section 9(1)
says that no such permission shall be granted to a taxable person (i) who is engaged in the
supply of services, or (ii) who makes any supply of goods which are not leviable to tax under
this Act, or (iii) who makes any inter-State outward supplies of goods, or (iv) who makes
any supply of goods through an electronic commerce operator who is required to collect tax
at source under section 56, or (v) who is a manufacturer of such goods as may be notified on
the recommendation of the Council.
III. All persons having same PAN shall opt for composition Further, the second proviso to
section 9(1) says that no such permission shall be granted to a taxable person unless all the
registered taxable persons, having the same PAN as held by the said taxable person, also opt
to pay tax under the provisions of section 9(1).
IV. Composition scheme stand withdrawn as aggregate turnover exceeds Rs. 50 lakhs
Section 9(2) says that the permission granted to a registered taxable person under section
9(1) shall stand withdrawn from the day on which his aggregate turnover during a financial
year exceeds Rs. 50 lakhs.
V. No collection of tax, no claim of input tax credit Section 9(3) says that a taxable person to
whom the provisions of section 9(1) apply shall not collect any tax from the recipient on
supplies made by him nor shall he be entitled to any credit of input tax.
VI. Consequences of violation of conditions Section 9(4) says that if the proper officer has
reasons to believe that a taxable person was not eligible to pay tax under section 9(1), such
person shall, in addition to any tax that may be payable by him under other provisions of this
Act, be liable to a penalty and the provisions of section 66 or 67, as the case may be, shall
apply mutatis mutandis for determination of tax and penalty.
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Whether supplies made without consideration will also come within
the purview of supply under GST?
Yes, but only those activities which are specified in Schedule I to the CGST Act / SGST Act. The said provision has
been adopted in IGST Act as well as in UTGST Act also.
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made or agreed to be made for a consideration by a person in the course or furtherance of
business. Schedule I specified the supply.
Analysis: Supply is the term replaced for the term sale; no scope has been left for any confusion
and the definition includes every term which shall be coined as sale. Even the supply which is
made or agreed to be made without a consideration will also amount to sale.
Any transfer of title to goods is a supply of goods, transfer of right to use goods [section 4(8) of
APVAT Act, 2005], Hire purchase transactions, transfer of business assets are also brought under
the ambit of term ‘supply’ as per Schedule II.
1.Supply includes
(a)all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license,
rental, lease or disposal made or agreed to be made for a consideration by a person in the course
or furtherance of business,
consideration
2.Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is
to be treated as a supply of goods or a supply of services.
Sale of land / Sale of building after occupation or completion will not attract GST. Thus,
sale of building before completion or before occupancy will attract GST
Such activities or transactions undertaken by the Central Government, a State Government or any
local authority in which they are engaged as public authorities, as may be notified by the
Government on the recommendations of the Council.
1.In case of Transfer of title in goods, OR, Right in goods, OR of undivided share in goods
without the transfer of title, OR, transfer under an agreement which stipulates that property will
pass at a future date upon payment of full consideration
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2.In case of Land & Building, – Any lease, tenancy, easement, license to occupy land or building (
both for commercial or residential purpose, fully or partly)
4.Transfer of Business Assets – Where goods forming part of the assets of a business are
transferred or disposed of, and are no longer forming part of business OR Where goods held for
business are put to use for any private use, in such a way, as not for business OR Where any
person ceases to be a taxable person, any goods earlier forming part of business, unless (a) the
business is transferred as a going concern to another person, or (b) the business is carried on by
a personal representative who is deemed to be a taxable person With or Without for a
Consideration
Inward Supply or Purchases– “Inward Supply” in relation to a person, shall mean receipt of
goods and/or services whether by purchase, acquisition or any other means and whether or not
for any consideration
Outward Supply or Sales – “Outward Supply” in relation to a person, shall mean supply of goods
and/or services, whether by sale, transfer, barter, exchange, license, rental, lease or disposal
made or agreed to be made by such person in the course or furtherance of business
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‘Fringe benefits’ to employees & directors under GST
Supply of Goods or Services between related persons will be supply even if made without
consideration – Para 2 of Schedule I of CGST Act . Also, employer & employee are related
persons as per 15 of CGST Act.
Further, para 4(b) of Schedule II of CGST Act, states that goods held or used for the purposes of
the business are put to any private use or are used, or made available to any person for use, for
any purpose other than a purpose of the business, whether or not for a consideration, the usage
or making available of such goods is a supply of services.
This will cover “ Fringe Benefits” given to employees or directors by a company and should be
subject to GST. This is a back-door entry for FBT, which was earlier in Income Tax Act, and was
very litigative.
Example – A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry
fruits, aerated drink and fruit juices when supplied for a single price is a mixed supply. Each of
these items can be supplied separately and is not dependent on any other. It shall not be a mixed
supply if these items are supplied separately.
Taxability – The tax liability on a mixed supply comprising two or more supplies shall be treated
as supply of that particular supply which attracts the highest rate of tax .
Example – Where goods are packed and transported with insurance, the supply of goods, packing
materials, transport and insurance is a composite supply and supply of goods is the principal
supply.
Principal Supply Means: The supply of goods or services which constitutes the predominant
element of a composite supply and to which any other supply forming part of that composite
supply is ancillary and does not constitute, for the recipient an aim in itself, but a means for
better enjoyment of the principal supply.
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Important Points to Note
1.Supply of goods or services or both is “ taxable event “ in GST as that event triggers liability to
pay GST
3.Supply by taxable person to related person is subject to GST even if there is no consideration
that is no amount charged and will cover the followings :
This will cover transactions between group companies ( like deputation of persons, supply of
goods on loan basis, common facilities shared by group companies), transactions between
branches
5.Benefits provided to employee by the employers like transport, meals, telephone. However, gifts
upto Rs. 50K to employees will not be subject to GST, but input credit will have to be reversed.
6.Supply by principal to agent is subject to GST, GST is payable on supplies to C & F agents.
However, commission agent has to pay GST only on his commission.
7.Import of services from related persons or from business establishment outside India is subject
to GST even if there is no consideration. Branch / Head office in India receiving free services from
Head Office / Outside India will be subject to GST.
9.Lottery tickets are goods and GST will be payable. GST will also be payable on services relating
to betting and gambling
10.Some services provided by government are taxable and mostly will be subject to reverse
charge.
SUMMARY
What is a supply under GST?
The expression “supply” simply means all forms of supply of goods/ services. It is made for a
consideration during the course of business and includes the following:
Sale
Transfer
Barter
Exchange
License
Rental
Lease
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Disposal
Import of services for a consideration (if even it is not in the course or
furtherance of business)
Certain activities specified in Schedule I of GST Act will also be treated as supply.
Therefore, the concept of composite supply and mixed supply becomes important. It helps to
determine the correct GST rate and provides uniform tax treatment under GST for such supplies.
For example, most business conventions look for combination of hotel accommodation, auditorium
and food.
2. If most of the service providers in the industry provide a package of services then it can be
considered as naturally bundled. For example, air transport and food on board is a bundle offered
by most airlines.
3. The nature of the various services in a bundle of services will also help to identify whether the
services are bundled.
If there is a main service and the others are ancillary service then it becomes a bundled service.
For example, five- star hotels often provide free laundry services on staying at the hotel. Renting
the room is the primary service and laundry is ancillary. A person can opt for laundry services only
if he is staying at the hotel
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Other indicators of bundling of services in the ordinary course of business (but they are not a
foolproof identification):
– There is a single price for the package even if the customers opt for less
– The components are normally advertised as a package
– The different components are not available separately
Under GST, a mixed supply will have the tax rate of the item which has the highest rate of
tax.
For example-
A Diwali gift box consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drink
and fruit juices supplied for a single price is a mixed supply. All are also sold separately. Since
aerated drinks have the highest GST rate of 28%, aerated drinks will be treated as principal supply
and 28% will apply on the entire gift box.
For example:
If a person buys canned foods, sweets, chocolates, cakes, dry fruits, aerated drink and fruit juices
separately and not as a Diwali gift box, then it is not considered a mixed supply. All items will be
taxed separately.
Tax rate applicable Tax rate of principal item Highest tax rate of all the items
Time of supply
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Time of supply in case of composite supply
If the principal supply is a service (for example, air transport and food on board) then the
composite supply will be treated as a supply of services. The provisions relating to time of supply
of services will apply.
Similarly, in the case of purchasing and transporting the goods, the supply of goods is the principal
supply. The composite supply will qualify as supply of goods and the provisions relating to time of
supply of goods will apply.
Similarly, if the highest tax rate belongs to goods then the mixed supply will be treated as supply of
goods. The provisions relating to time of supply of services would be applicable.
For more details on time of supply of goods and services please refer to our various articles.
Further examples
Example 1
Booking train tickets: You are booking a Rajdhani train ticket which includes meal. It is a bundle of
supplies. It is a composite supply where the products cannot be sold separately. You will not buy
just the train meal and not the train ticket. The transportation of passenger is, therefore, the
principal supply.
Rate of tax applicable to the principal supply will be charged to the whole composite bundle.
Therefore, rate of GST applicable to transportation of passengers by rail (5%) will be charged by
IRCTC on the booking of Rajdhani ticket.
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A works contract is a mixture of service and transfer of goods. For example, construction of a new
building where a combination of materials like bricks, cement, sand along with services of
labourers, engineers, architects etc. produce a building (goods).
Example 4: Restaurant
Restaurant business provides a bundled supply of preparation of food and serving the same.
It is also a classic example of a composite supply. However, to avoid the confusion under earlier
tax law, GST Act clearly clarifies restaurants as a supply of service with specific tax rates.
IGST/SGST/UTGST
Framework under the Goods and Services Tax:
Under the GST law taxes can be further classified into these four types:
Now, let us understand each one in detail. Starting with our discussion first with CGST.
The CGST is charged to compensate the central government for previously existed indirect taxes
such as
SGST is charged along with and at the equal rates that of CGST on a good or service. This tax is
charged by all the states of India but has also been adopted by two union territories of
Puducherry and
Delhi,
because both of these union territories have their own legislative assembly and council.
The tax revenue under SGST goes to the State Government treasury or the eligible Union
Territory, where the consumption of goods or service has taken place.
UGST is also charged at the same rates that of CGST. But, amongst UTGST or SGST only one at
a time shall be levied together with CGST in each case.
Currently, there are 7 union territories in India:
Chandigarh
Lakshadweep
Daman and Diu
Dadra and Nagar Haveli
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Andaman and Nicobar Islands
Delhi
Puducherry
But out of these Delhi and Puducherry levy SGST and not UTGST because they have their own
elected members and Chief Minister. Hence, they function as partial – states. As the SGST Act
cannot be applied on a union territory which does not have its own legislature. The UTGST Act
has been introduced by the GST Council.
IGST has provided a standardization to taxation on the supply of goods and services made
outside the state. This applies both on a supply made outside the state and those made outside
the country.
The rate of IGST would always be approximately equal to the CGST rate plus SGST rate.
For Example:-
Now, let’s us take a situation to understand all the taxes under GST in a nimble way;
Suppose the sale of goods is done worth Rs 10 lakhs. It attracts GST @ 18%. Consider the
computation GST payable under relevant heads in the following scenarios
The sale is done within the same state i.e. intrastate sales
Sale is done within the union territory i.e. intrastate sales
The sale is done to another state i..e interstate sales
Situation Analysis
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Question
Let us assume that
Goods worth Rs. 20,000 are sold by Shubham from Gujarat to dealer Rahul in
Gujarat
Dealer Rahul resells such goods to trader Mahesh in Uttar Pradesh for Rs.
22000
Trader Mahesh now sells such goods to consumer XYZ in Uttar Pradesh for
Rs 29,000
Solution
Since Shubham sells goods to Rahul in Gujarat, the supply takes place in the
same state (Gujarat in this case). Hence, this is in the nature of Intra state
supply. Further, for this Intra State transaction between Shubham and
Rahul, CGST@9% and SGST@9% each shall be applicable.
In the second instance, dealer Rahul resells such goods in different state i.e.
Uttar Pradesh to Mahesh. This is the case of inter state supply. Hence, IGST
@18% shall be calculated on this particular transaction between Rahul and
Mahesh.
And at the end, Mahesh sells such goods to end user in the same state of
Uttar Pradesh to XYZ. Since,supply within the state falls under an Intra state
supply CGST@9% and SGST@9% each shall be levied on this supply.
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1 Shubham 20,00 20000*9=180 —— 20000*9=1800
to Rahul 0 0
Net 360
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governmen
t
Intra-State supply of goods or services is when the location of the supplier and the place
of supply i.e., location of the buyer are in the same state. In Intra-State transactions, a seller
has to collect both CGST and SGST from the buyer. The CGST gets deposited with
Central Government and SGST gets deposited with State Government.
Inter-State supply of goods or services is when the location of the supplier and the place
of supply are in different states. Also, in cases of export or import of goods or services or
when the supply of goods or services is made to or by a SEZ unit, the transaction is
assumed to be Inter-State. In an Inter-State transaction, a seller has to collect IGST from
the buyer.
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What is Integrated Goods and Services Tax
(IGST)?
Under GST, IGST is a tax levied on all Inter-State supplies of goods and/or services and will be
governed by the IGST Act. IGST will be applicable on any supply of goods and/or services in both
cases of import into India and export from India.
Note: Under IGST,
Compensation Fund: The Act allows the central government to levy a GST Compensation Cess on
the supply of certain goods and services. The receipts from the cess are deposited to a GST
Compensation Fund. The amount deposited in the Fund is used to compensate states for any loss in
revenue following the implementation of GST.
Under the Act, any unutilised amount in the Compensation Fund at the end of the transition period
(five years from the date on which the state brings its State GST Act into force) is distributed in the
following manner: (i) 50% of the amount is shared between the states in proportion to their total
revenue, and (ii) remaining 50% is a part of the centre’s divisible pool of taxes.
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The Bill inserts a provision specifying that any unutilised amount (as recommended by the GST
Council) in the Compensation Fund at any time during the transition period will be distributed in the
following manner: (i) 50% of the amount will be shared between the states in proportion to their base
year revenue (2015-16), and (ii) remaining 50% will be part of the centre’s divisible pool of taxes.
The Act specifies that compensation payable to states has to be released at the end of every two
months. The Bill states that in case of shortfall in this amount of compensation, it may be recovered
in the following manner: (i) 50% of the amount from the centre, and (ii) the remaining 50% from the
states in proportion to their base year revenue. However, this amount should not exceed the total
amount transferred to the centre and states.
Payment of Compensation
The implementation of GST has seen a number of cesses being subsumed, including the Krishi
Kalyan Cess and Swachh Bharat Cess among others. However, the cess of crude oil and
education cess on imported commodities will still be applicable under GST. The government,
however, requires additional revenue to ensure that the affected states are compensated, which
led the GST Council to a decision to impose extra cesses for five years on a few commodities that
fall above the 28% tax bracket. The commodities which will attract the extra cesses include coal,
tobacco products, motor vehicles (including all kinds of cars, yachts and personal aircrafts). The
extra cesses charged on these products will not be applicable after five years, according to Arun
Jaitley, the Finance Minister. It was also said that the states which incur losses will have to look
out for alternative revenue sources.
Structure of GSTN
Private players own 51% share in the GSTN, and the rest is owned by the government. The
authorized capital of the GSTN is ₹10 crore (US$1.6 million), of which 49% of the shares are
divided equally between the Central and State governments, and the remaining is with private
banks.
The GSTN has also been approved for a non-recurring grant of Rs. 315 crores. The contract for
developing this vast technological backend was awarded to Infosys in September 2015.
The GSTN is chaired by Mr. Navin Kumar, an Indian Administrative Service servant (1975 batch),
who has served in many senior positions with the Govt. of Bihar, and the Central Govt.
Shareholder Shareholding
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State Governments & EC 24.5%
HDFC 10%
Total 100%
The GSTN is a trusted National Information Utility (NIU) providing reliable, efficient and robust IT
backbone for the smooth functioning of GST in India.
GST is a destination based tax. The adjustment of IGST (for inter-state trade) at the government
level (Centre & various states) will be extremely complex, considering the sheer volume of
transactions all over India. A rapid settlement mechanism amongst the States and the Centre will
be possible only when there is a strong IT infrastructure and service backbone which captures,
processes and exchanges information.
Please read our article to know more about how the Centre and the States will settle IGST.
The government will have strategic control over the GSTN, as it is necessary to keep the
information of all taxpayers confidential and secure. The Central Government will have control
over the composition of the Board, mechanisms of Special Resolution and Shareholders
Agreement, and agreements between the GSTN and other state governments. Also, the
shareholding pattern is such that the Government shareholding at 49% is far more than that of any
single private institution.
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4. Expenses Will Be Shared
The user charges will be paid entirely by the Central Government and the State Governments in
equal proportion (i.e. 50:50) on behalf of all users. The state share will be then apportioned to
individual states, in proportion to the number of taxpayers in the state.
2nd part Fraud Analytics Tools, security audit and other security
functions(will be outsourced based on tender)
3rd part Operating expenses such as salary, rent, office expenses, internal IT
facilities
Functions of GSTN
GSTN is the backbone of the Common Portal which is the interface between the taxpayers and
the government. The entire process of GST is online starting from registration to the filing of
returns.
It has to support about 3 billion invoices per month and the subsequent return filing for 65 to 70
lakh taxpayers.
The GSTN will handle:
Invoices
Various returns
Registrations
Payments & Refunds
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TAX INVOICE
Information Required in a GST Invoice
The tax invoice issued must clearly mention information under the following 16 headings:
1. Name, address and GSTIN of the supplier
2. Tax invoice number (it must be generated consecutively and each tax invoice will have a unique
number for that financial year)
3. Date of issue
4. If the buyer (recipient) is registered then the name, address and GSTIN of the recipient
5. If the recipient is not registered AND the value is more than Rs. 50,000 then the invoice
should carry:
i. name and address of the recipient
ii. address of delivery
iii. state name and state code
6. HSN code of goods or accounting code of services**
7. Description of the goods/services
8. Quantity of goods (number) and unit (metre, kg etc.)
9. Total value of supply of goods/services
10. Taxable value of supply after adjusting any discount
11. Applicable rate of GST
(Rates of CGST, SGST, IGST, UTGST and cess clearly mentioned)
12. Amount of tax
(With breakup of amounts of CGST, SGST, IGST, UTGST and cess)
13. Place of supply and name of destination state for inter-state sales
14. Delivery address if it is different from the place of supply
15. Whether GST is payable on reverse charge basis
16. Signature of the supplier
** HSN Code:
Turnover less than 1.5 crores- HSN code is not required to be mentioned
Turnover between 1.5 -5 crores can use 2-digit HSN code
Turnover above 5 crores must use 4-digit HSN code
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** GST Council may notify about:
the number of digits of HSN code for goods or the accounting code for
services and the various classes of registered persons should be mentioned
the class of registered persons who will not be required to mention the codes
The registered person shall issue a consolidated tax invoice for such supplies at the end of each
day in respect of all such supplies.
In all other cases, the registered person MUST issue a tax invoice. Failure to do so is
an offence under GST Act and will attract penalty.
Form GSTR-1 will contain the serial number of invoices issued during the tax period along with
other details of purchases.
Registered persons selling exempted goods/services or paying GST under composition scheme
will need to issue a separate bill of supply. We have a separate article dealing with this subject.
Under the proposed GST regime all the key Indirect tax legislations would be subsumed and
hence it is expected that it would result in a simpler tax regime especially for the Information
Technology / Information Technology Enabled Services.
GST is a destination based tax on consumption of goods or services. It is also the policy of the
Government of India to export the goods and/or services not the taxes out of India. Thus, exports
will become cheaper making Indian products or services will be more competitive in the
international markets.
This module would cover in-depth impact of GST on export and import of goods and services
under GST.
Section 2 (10) defines of IGST Act, 2017 defines – “import of goods” with its grammatical
variations and cognate expressions, means bringing goods into India from a place outside India.
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Meaning of Export & Import of Services
“Import of Services” as defined under Section 2 (11) of IGST Act, 2017 means the supply of any
service, when –
“Export of Services” as defined under Section 2 (6) of IGST Act, 2017 means
the supply of any service, when –
1.the supplier of service is located in India;
4.the payment for such service has been received by the supplier of service in convertible foreign
exchange; and
5.the supplier of service and the recipient of service are not merely establishments of a distinct
person in accordance with Explanation 1 in section 8;
6.Explanation 1.— For the purposes of this Act, where a person has,—
an establishment in a State or Union territory and any other establishment outside that
State; or
The Taxation Laws (Amendment) Act, 2017 provides that IGST on imports will be levied at value
of imported article as determined under the Customs Act plus duty of customs and any other sum
chargeable in addition to customs duty (excluding GST and GST Cess). This in effect makes levy
of IGST at par with present levy of CVD which is on basic value plus customs duty.
As per the definition of ‘supply’ under CGST law, import of services for a consideration whether or
not in the course or furtherance of business is deemed to be supply and as per the IGST law,
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supply of services in the course of import into the territory of India, shall be deemed as supply of
services in the course of inter- State trade or commerce. Accordingly, Integrated Tax would be
levied on import of services. Although the provisions are yet to be notified, the Integrated Tax on
import of services would be payable by the recipient under reverse charge.
Further, there would be no change in applicability of countervailing duty levied under section 9BB
of the Customs Tariff Act, 1975 (and different from the additional duty of Customs levied under
section 3, ibid., also known as CVD), anti-dumping or safeguard duties, where ever imposed by
the Government.
Export under bond or letter of undertaking without payment of Integrated Tax and
claim refund of unutilized input tax credit.
Export on payment of Integrated Tax and claim refund of the tax so paid on goods and
services exported. The aforesaid refunds will be subject to rules, safeguards and
procedures as may be prescribed.
The definition of “export of service” is similar to the present law, and therefore no new conditions
are prescribed. However, place of supply rules would need to be evaluated on a case-to-case
basis to determine the tax applicability on such services.
The default rule for place of supply for export of service shall be the location of the service
recipient, where the address on record of the recipient exists with the exporter. Hence, it will be
critical for exporters to ensure that the address of service recipient on record can be established
before the authorities on request.
The typical IT/ ITES services that may fall under the default rule include software development,
BPO operations, software consultancy, etc. Apart from these, certain services like software
support/ maintenance and intermediary services will also move to the default rule, as there are no
exceptions carved out for these, unlike under the present law.
There are exceptions to the above default rule, wherein training services could be based on the
performance location of training, but at the same time, online training is not specified, and
therefore could fall under default rule.
Thus, A detailed analysis of the nature of services and its place of supply would need to be carried
out to determine whether the services would be treated as exports and zero rated.
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GST on Software transactions including cloud computing
Packaged software provided on media is likely to be covered under “goods”, and therefore is likely
to be taxed based on the rate of tax and place of supply for goods. However, customised software
may not qualify as “goods”, and therefore may be treated as services.
However, with respect to software supplied electronically, the same may not be covered under
“goods” as the definition of goods does not include intangible property. Hence, it would be
covered under “service”. This is likely to put to rest the vexed issue of dual taxation of software
supplied electronically under the present laws.
In the context of cloud computing, the draft law provides that transfer of right in goods without
transfer of title, including leasing transaction, shall be treated as a service. Hence, cloud services
shall be treated as supply of “service” and therefore, the debate of dual taxes of VAT and service
tax will not arise under GST.
The GST paid on such procurements will be eligible as refund and therefore, will impact the
working capital requirements of such units.
The efficacy of the STP scheme therefore seems doubtful upon transition to the GST regime, as
the benefit may be restricted only to BCD paid on import of non-IT products.
Upfront exemption of service tax for SEZ units (by way of Form A1/ A2) is also likely to be
converted to refund.
No refund of unitized input tax credit shall be allowed in cases other than exports
including zero rated supplies or in cases where the credit has accumulated on account
of rate tax on inputs being higher than the rate of tax on output supplies, other than nil
rated or fully exempt supplies – first proviso to section 54(3) of CGST Act.
No refund of unutilized input tax credit shall be allowed in cases where the goods
exported out of India are subjected to export duty – second proviso to section 54(3) of
CGST Act.
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No refund of input tax credit shall be allowed if the supplier of goods or services avails
duty drawback of CGST / SGST / UTGST or claims refund of IGST paid on such supplies
– third proviso to section 54 (3) of CGST Act.
Drawback – “Drawback” in relation to any goods manufactured in India and exported, means the
rebate of duty, tax or cess chargeable on any imported inputs or on any domestic inputs or input
services used in the manufacture of such goods – section 2(42) of CGST Act.
Deemed Exports
India gets foreign aid from World Bank, Asia Development bank etc. for various prestigious
projects in India for which global tenders are invited and India gets aid in foreign currency.
Indian manufacturers and suppliers of services from India have to quote in competition with
foreign suppliers. Evaluation of bids is done without considering customes duty. Since the supply
of goods and services are for projects financed with free foreign exchange, these supplies are
treated as ‘deemed exports’.
Similarly, supplies to EOU units and services do not leave the country. Suppliers of goods and
services get payment in Indian rupees and not in foreign currency.
Deemed exports refer to those transactions in which goods supplied do not leave country, and
payment for such supplies is received in para 7.02 of Foreign Trade Policy 2015-2020 shall be
regarded as ‘deemed exports’, provided that goods are manufactured in India.
As per Foreign Trade Policy 2015-2020, followings are treated as deemed exports:
Supplies to UN Agencies
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Supply of services where consideration is received in Indian currency or a currency
other than convertible currency. For example supply of consultancy service by an
Indian consulting firm to an overseas entity, payment for which is made in Indian
rupees by Indian branch of overseas entity.
Services provided to overseas branch would not be eligible as export of services due to
specific exclusion for such transactions in the definition of “export of service”. This
could entail reversal of input credits as such supply would be treated as non-taxable
and not as zero rated.
Definition of import of service also excludes services imported from overseas branch. However,
the law has certain contradictions and therefore clarity to be obtained on this.
Supplies to SEZ unit and SEZ Developer are treated at par with physical exports. Provisions in
CGST Act have been designed by make exports tax free. Export benefits under GST – In relation
to GST, following are the concessions / incentives for exports:
(1) Exemption from GST on final products or (2) Refund of GST paid on inputs. Exporting units
need raw materials without payment of taxes and duties, to enable them to compete with world
market. Government has devised following schemes for this purpose:
(a)Special Economic Zones at various places where inputs are allowed to be imported without
payment of duty and finished goods are exported, and (b) Export Oriented Undertakings (EOU),
and, (c) Duty Drawback Scheme, and (d) Schemes of Advance Authorisation, DEPB and DFIA.
Elaborate procedures have been prescribed for the above, to ensure that the benefits are not
misused.
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Anti-Dumping Duty
Safeguard Duties
After the introduction of full and complete GST major import gaining sectors include
leather and leather products; furniture and fixtures; agricultural sectors; coal and lignite;
agricultural machinery; industrial machinery; other machinery; iron and steel; railway
transport equipment; printing and publishing; and tobacco products. The moderate gainers
include metal products; non-ferrous metals; and transport equipment other than railways.
Imports are expected to decline in textiles and readymade garments; minerals other than coal,
crude petroleum, gas and iron ore; and beverages.
Export of goods or services or both and supplies of goods or services or both to SEZ
unit or SEZ developer will be zero rated supply – section 16 (1) of IGST Act.
Credit of input tax may be availed for making zero-rated supplies, even if such supply is
exempted supply – section 16(2) of IGST Act.
Refund of unutilized input tax credit shall not be allowed in cases where the goods
exported out of India are subjected to export duty.
Refund of input tax credit shall not be allowed if the supplier of goods or services avails
duty drawback of CGST / SGST / UTGST or claims refund of IGST paid on such supplies
[Thus, duty drawback of customs portion can be availed].
Benefits will be available to ‘ deemed exports’ also. Mostly, the benefit will be through
refund route and not direct exemption.
If goods are imported, IGST and GST Compensation Cess will be payable.
If goods are taken to warehouse and then cleared from warehouse, IGST and GST
Compensation Cess will payable at the time of removal of warehouse.
IGST Act or CGST Act make no provision in respect of high seas sale i.e. sale in course
of imports. In absence of such specific provision, it seems IGST will be payable if sale
takes place within Exclusive Economic Zone i.e. within 200 nautical miles inside sea.
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1. GST eliminates the cascading effect of tax
GST is a comprehensive indirect tax that was designed to bring the indirect taxation under one
umbrella. More importantly, it is going to eliminate the cascading effect of tax that was evident
earlier.
Cascading tax effect can be best described as ‘Tax on Tax’. Let us take this example to
understand what is Tax on Tax:
Before GST regime:
A consultant offering services for say, Rs 50,000 and charged a service tax of 15% (Rs 50,000 *
15% = Rs 7,500).
Then say, he would buy office supplies for Rs. 20,000 paying 5% as VAT (Rs 20,000 *5% = Rs
1,000).
He had to pay Rs 7,500 output service tax without getting any deduction of Rs 1,000 VAT already
paid on stationery.
His total outflow is Rs 8,500.
Under GST
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Service Tax 10 lakhs
Under GST, however, there is just one, unified return to be filed. Therefore, the number of returns
to be filed has come down. There are about 11 returns under GST, out of which 4 are basic
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returns which apply to all taxable persons under GST. The main GSTR-1 is manually populated
and GSTR-2 and GSTR-3 will be auto-populated.
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GST Benefits
The Goods and Services Tax (GST) has several benefits that help in integrating the
economy while making Indian products more competitive internationally. It also
makes compliance with tax rates and procedures easier.
The Goods and Services Tax (GST) is imposed on the supply of products and/or services within
the country. It subsumes multiple indirect taxes that are imposed by the State Governments or the
Central Government, such as Service Tax, Purchase Tax, Central Excise Duty, Value Added Tax,
Entry Tax, Luxury Tax, Local Body Taxes, etc.
GST offers benefits to the government, the industry, as well as the citizens of India. The price of
goods and services is expected to reduce under the new reform, while the economy will receive a
healthy boost. It is also expected to make Indian products and services internationally competitive.
Common Portal
Uniformity in Taxation
The objective of GST is to drive India towards becoming an integrated economy by charging
uniform tax rates and eliminating economic barriers, thereby making the country a common
national market. The subsuming of the aforementioned State and Central indirect taxes into just
one tax will also provide a major lift to the Government’s ‘Make in India’ campaign, as goods that
are produced or supplied in the country will be competitive not only in national markets, but in the
international ones as well. Moreover, IGST (Integrated Goods and Services Tax) will be levied on
all imported goods. IGST will be equal to State GST + Central GST, more or less, thus bringing
uniformity in taxation on both local as well as imported goods.
Cascading of Taxes
The cascading of taxes will be prevented by GST as the whole supply chain will get an all-
inclusive input tax credit mechanism. Business operations can be streamlined at each stage of
supply thanks to the seamless accessibility to input tax credit across products or services.
Simpler and Lesser Number of Compliances
Compliance will be simpler through the harmonisation of tax rates, procedures, and laws.
Synergies and efficiencies are expected across the board thanks to common formats/forms,
common definitions, and common interface via the GST portal. Inter-state disputes such as those
on e-commerce taxation and entry tax that currently prevail will no longer cause concerns, while
multiple taxation on the same transactions will also be removed. Compliance costs will also reduce
as a result.
The previous tax regime had service tax and VAT, and they both had their own compliances and
returns. GST will merge them and lower the number of returns as well as the time spent on tax
compliances. GST has around 11 returns under it. Four of them are basic returns that are
applicable to all taxable entities under GST. Although the number of returns could increase, the
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main GSTR-1 shall be manually populated, while GSTR-2, GSTR-3, AND GSTR-4 shall be auto-
populated.
Common Procedures
The procedures for refund of taxes and registration of taxpayers will be common, while the formats
of tax return will be uniform. The tax base will also be common, as will the system of assortment of
products or services in addition to the timelines for each activity, thereby ensuring that taxation
systems have greater certainty.
Common Portal
Since technology will be used heavily to drive GST, taxpayers will have a common portal (GSTN).
The procedures for different processes like registration, tax payments, refunds, returns, etc., will
be automated and simplified. Whether it is the filing of returns, filing of refund claims, payment of
taxes, or even registration, all processes will be done online via GSTN. The verification of input tax
credit will be done online too, and input tax credit across the country will be matched electronically,
thereby turning the process into an accountable and transparent one. As a result, the process will
also be much quicker since the taxpayer will not have to interact with the tax administration.
Lowered Tax Burden on Industry and Trade
The average tax burden on industry and trade is expected to lower because of GST, resulting in a
reduction of prices and increased consumption, which will eventually increase production and
ultimately enhance the development of various industries. Domestic demand is set to increase and
local businesses will have greater opportunities, thus generating more jobs within the country.
Regulation of Unorganised Industries
Certain sectors in the country, such as textile and construction, are highly unorganised and
unregulated. GST aims to ensure that payments and compliances are done online, and input
credit can only be availed when the supplier accepts the amount, thus ensuring that these
industries have regulation and accountability.
Composition Scheme
Small businesses can find respite from tax burdens through the composition scheme. Small
businesses that earn turnovers ranging from Rs.20 lakh to Rs.50 lakh will be subject to lower
taxes.
These are some of the main benefits offered by GST. In the following sections we shall take a brief
look at the advantages of the regime to the common man, the economy, and industry and trade.
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Benefits to the Economy
Creation of a unified common market.
Increase in manufacturing processes.
Enhancement of exports and investments.
Generation of more jobs through enhanced economic activity.
Benefits to Industry and Trade
Uniform procedures for registration, filing of returns, payment of taxes, and tax
refunds.
Elimination of cascading of taxes thanks to the seamless flow of tax credit from the
supplier or manufacturer to the retailer or user.
Small scale suppliers can make the most of the composition scheme to make their
goods less expensive.
Higher efficiency with regards to the neutralisation of taxes so that exports are
globally competitive.
Summing Up
On priority, it is up to the government to address the capacity building amongst the lesser-
endowed participants, such as the small-scale manufacturers and traders. Ways have to be found
for lowering the overall compliance cost, and necessary changes may have to be made for the
good of the masses. GST will become good and simple, only when the entire country works as a
whole towards making it successful.
GST is a game-changing reform for the Indian Economy, as it will bring the net appropriate price of the
goods and services. The various factors that have impacted Indian economy are:
1. Increases competitiveness
The retail price of the manufactured goods and services in India reveals that the total tax
component is around 25-30% of the cost of the product. After implementation of GST, the prices
have gone down, as the burden of paying taxes has been reduced to the final consumer of such
goods and services. There is a scope to increase production, hence, competition increases.
2. Simple Tax Structure
Calculation of taxes under GST is simpler. Instead of multiple taxation under different stages of
supply chain, GST is a one single tax. This saves money and time.
3. Economic Union of India
There is freedom of transportation of goods and services from one state to another after GST.
Goods can be easily transported all over the country, which is a benefit to all businesses. This
encourages increase in production and for businesses to focus on PAN-India operations.
4. Uniform Tax Regime
GST being a single tax, it has made it easier for the taxpayer to pay taxes uniformly. Previously,
there used to be multiple taxes at every stage of supply chain, where the taxpayer would get
confused, which a disadvantage.
5. Greater Tax Revenues
A simpler tax structure can bring about greater compliance, this increases the number of tax
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payers and in turn the tax revenues collected for the government. By simplifying structures, GST
would encourage compliance, which is also expected to widen the tax base.
6. Increase in Exports
There has been a fall in the cost of production in the domestic market after the introduction of
GST, which is a positive influence to increase the competitiveness towards the international
market.
Impact of GST on Different Sectors
1. Consumer Goods & Services
The GST rates for the FMCG industry is set at 18-20%. While most are happy with the introduction
of GST, the ones who are heavily affected are opposed.
2. Transportation
The rates for cabs has been lowered to 5% and for air travel also. So, this is a welcome move for
those in this sector.
3. E-Commerce
Post GST, e-commerce operators collect 1% of the net value of the taxable supplies, which is called
Tax Collected at Source (TCS).
4. Entertainment & Hospitality Sector
This sector was affected as this sector falls in the 28% category. Movie tickets, hotel rates will now
be costlier.
5. Financial Products and Services
The, financial services such as funds and insurances, (Non-Banking Financial Company) are most
impacted.
6. Start-Ups
GST has a positive influence towards start-ups. It had got both advantages and disadvantages for
start-ups. However, as a start-up, already facing the stress of a new business, the question of how
the new GST will impact your business, must be difficult for you.
7. Inflation and Economic Activity
GST is a Inflationary measure. However, the rise in the tax rate on services to 18% is expected to
raise inflation.
8. Stock Transfer
Post the introduction of GST, tax is levied on branch transfers and input tax can be claimed later.
9. Export of Goods & Services
At all stages of the supply chain there is no tax, post GST. Moreover, the availability of input credits
is welcomed.
10. Gold and Gold Jewellery Prices
Post GST the tax rate was set to 18% initially then brought down to 5% tax rate
11. Rent
Since the implementation of GST the exemption limit for renting out commercial property is Rs. 20
lakhs and there is not GST on house rent.
12. SEZ
Under GST regime, SEZ’s have benefitted from a zero-tax rate.
13. Affordable Housing
Purchase of houses is non-taxable, however under construction house will carry a GST tax rate. The
GST rates for homes purchased under CLSS, EWS, LIG, MIG1/11 will be 8%, after deducting cost of
land. However, those doesn’t qualify CLSS, etc, will have to pay 12% GST on constructed houses.
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14. Real Estate Sector
This sector has mostly benefitted from the introduction of GST, as much of this sector is becoming
more transparent.
15. Logistics
The rate pre-GST was above 26% and post the implementation of GST there was reduction to 18-
21%, which was good news for the sector.
16. Manufacturing Industry
GST, demands businesses to set-up mechanism for meeting the requirements of GST. Therefore,
once the companies adapt the requirements, the compliance costs will go down drastically.
17. Automobile Industry
GST absorbed indirect tax regime, which attracted several duties and taxes on the sale of vehicles
and spares and accessories.
18. Chemical Industry
Implementation of GST is believed to be positive to the chemical industry, especially in the long
term.
19. Tobacco Industry
The new GST rates are less than the combined taxes during pre-GST regime.
20. Stainless Steel Industry
GST had made a very good impact on steel industry. After issuing new tax rates, it has become
more favourable to steel industry. The GST rate for primary steel industries is imposed at 18%,
which is helpful for them to grow.
21. Textile Industry
Despite some changes under the GST regime, the textile sector benefitted with the
implementation of the regime.
22. Coal Sector
After the GST implementation, the coal transportation rates have done down to 5% through trains,
and thus the logistics costs has been decreased.
23. Power Sector
Overall impact of GST on power sector is positive. Domestic coal, is in the 5% tax slab. The impact
of GST will be positive for the electrical and the lighting sectors as the rate is now 18%.
24. Exports
In the pre-GST tax system, import of the goods carried several import duties, however, after GST,
IGST has replaced the indirect taxes that was earlier imposed on import of goods and services.
25. Domestic appliances and Electrical Machinery
There is not a huge impact in this industry as the new GST rates around 25%, which is similar to
the rates pre-GST.
26. Job works
Special provisions exist for removal of goods for job-work and receiving back goods after
processing from the job-worker carry no GST. The benefit of these provisions is extended both to
the principal and the job-worker.
27. Various segments of Indian Railways
The impact of GST in this sector is very minimal as the rate is kept at the lowest tax rate of 5% to
ensure passengers benefit the most.
28. Hospitality Industry
This is another industry that has benefited as the previous tax regime levied up to 27% tax. Post
GST, the tax rates have been reduced.
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29. Aviation Sector
The industry has mixed feelings about the introduction of GST, especially the GST rates for airline
fuel.
30. Pharmaceutical Industry
This industry will see an increase in costs after GST implementation as the cost of medicines will
rise by 2.3% in the 12% bracket and medicines with 5% will see no increase in MRP.
31. Cement Industry
GST will not affect this industry drastically, the tax rates imposed will get absorbed in the cost of
cement production.
32. Digital Advertising Industry
This industry which is fast growing, is a cheaper method for companies as GST will have less effect
in this sector, as compared to traditional marketing.
33. Sweet makers
They are trying to figure out if they need to pay 28% tax on it as many of our chocolate variations
have more than 5% cocoa content. Badam milk, basundi and rasmalai are also a concern as we
aren’t sure if they are sweets (5% tax) or beverages (12% tax).
34. Handicraft Sector
One of the largest sector of the country, which is most affected by GST. Therefore, GST is not
welcomed by the artisans.
35. Alcohol Industry
There is no GST on alcohol, instead there is an increase in the price of alcohol. Price of a beer is
going to raise by 15% and wine and other hard drinks will be increasing by 4%.
UNIT IV
INDIRECT TAX REGIME
IGST - INTEGRATED GST LEVIED BY THE CENTRAL GOVERNMENT,
INTERSTATE TRANSACTIONS AND IMPORTED GOODS OR SERVICES -
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STATE GST(SGST); THE STATE GOODS AND SERVICE TAX LAW, POWER OF
CENTRAL GOVERNMENT TO LEVY TAX ON INTERSTATE TAXABLE
SUPPLY, IMPACT OF GST ON STATE REVENUE; IMDEMNIFYING STATE
REVENUE LOSS; UTGST - UNION TERRITORY GOODS AND SERVICE TAX
LAW - GST EXEMPTION ON THE SALE AND PURCHASE OF SECURITIES,
SECURITIES TRANSACTION TAX (STT)
The scope of IGST Model gives meaning to the GST Act of which IGST is one of the component. The IGST Act
clarifies that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable
goods and services with appropriate provision for consignment or stock transfer of goods and services.
The seller making supply outside the state will pay IGST on value addition after adjusting available credit of
IGST, CGST, and SGST on his purchases. And the exporting State will transfer to the Centre the credit of SGST
used in payment of IGST.
On the other hand, the Importing dealer will claim credit of IGST while discharging his output tax liability in his
own State. The Centre will then transfer to the importing State the credit of IGST used in payment of SGST.
The relevant information will also be submitted to the Central Agency which will act as a clearing house
mechanism, verify the claims and inform the respective governments to transfer the funds.
2. What is IGST?
"Integrated Goods and Services Tax” (IGST) means tax levied under this Act on the supply of any goods and/or
services in the course of inter-State trade or commerce and for this purpose,
Finer point 2
An export of goods and/or services shall be deemed to be a supply of
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goods and/or services in the course of inter-State trade or commerce.
Integrated goods and services tax (IGST) would mean the tax levied under IGST Act on the supply of any goods
and / or services in the course of inter-state trade or commerce.
Integrated GST shall also apply to import of goods and services into India. The basic ideology stipulates that any
supply of goods or services in the course of import of goods or services into Indian territory shall be deemed to
be supply involving inter-state trade or commerce and hence liable to IGST.
For transactions that are look alike of import transactions and export of goods and services, shall be deemed to
be supply in course of inter-state trade or commence.
This Act shall be applicable to whole of India, i.e., including the State of Jammu & Kashmir. And shall come into
force from a date which will be notified by the Central Government by way of a notification.
As Dealers making inter- state supplies will be e registered and correspondence with them will be by e mail,
the compliance level will improve substantially.
The IGST Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.
6. IGST Example
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Mr. X, a trader registered in Bangalore, sold goods to Mr. Y, a registered trader in Chennai, for Rs. 10 Lakhs and
further Mr. Y sold these goods to Mr. Z, a registered retailer from Jaipur, for Rs. 11 Lakhs.
Mr. X will collect IGST at the CGST + SGST rate on Rs. 10 Lakhs.
As we all know that CGST SGST and IGST full form expands to Central
For First transaction
between Mr. X and Mr. Y GST/ State GST and Integrated GST respectively.
Mr. Y will get the credit which he can use for further payment of his GST.
Tamil Nadu will get the SGST on Rs. 10 Lakhs from Karnataka on the first
transaction between Mr. X and Mr. Y.
Who pockets the taxes
Tamil Nadu will also be collecting tax on the second transaction between
here? [Note : Key point to
Mr. Y and Mr. Z on the amount of Rs. 11 Lakhs which it will further transfer
remember : GST is a
consumption based tax.] to the Central Government (CGST) and to the Rajasthan government
(SGST).
What conclusion could be derived from this IGST example ? Inter-State trade will definitely benefit as the
interstate transactions do not have to be taxed twice.
This is in contrast to erstwhile tax laws where if you purchased goods from Chennai, you pay tax there and then
again in your state in which you ultimately sell it. This helps the traders to increase their Inter-State trade by
lowering tax burden.
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a) Maintenance of uninterrupted ITC chain on inter-State transactions.
b) No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.
c) No refund claim in exporting State, as ITC is used up while paying the tax.
e) Level of computerisation is limited to inter-State dealers and Central and State Governments
should be able to computerise their processes expeditiously.
f) As all inter-State dealers will be e-registered and correspondence with them will be by
e-mail, the compliance level will improve substantially.
g) Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into
account.
The government of India rolled out Goods and Services Tax to overcome the challenges faced by the
taxpayers under previous indirect tax regime. The issues like tax on tax and multiple taxes resulted in
taxpayers paying higher taxes. Furthermore, increased compliance with regard to filing multiple tax returns
lead to delays and increased non – payment of taxes.
With the advent of GST, the government is on the path of bringing a common national market with unified
tax rates. Further, it has been able to reduce tax compliance and simplify return filing by going online with
GST. Although this has led to increased transparency and easy return filing relative to previous tax regime.
There is still a whole lot that government intends to do over time via modifications in the GST
Council Meetings.
Needless to say, GST and its benefits have impacted taxpayers across the nation and various industries.
Some of these include:
Hoteliers
Restaurant Owners
Packaged Food Industry
Exporters
Importers
Freelancers
Job Workers
Real Estate Business Owners
Manufacturers
Handicraft Industry
Tourism Industry
Small Business Owners (Registered Under Composition Scheme)
E- Commerce Sellers
In this article, we will see how imports are taxed under GST. Therefore, we first need to know what
constitutes import of goods and services and the nature of such supplies under GST.
Section 7(2) of the IGST act further provides that any supply of imported goods that takes place before such
goods cross India’s customs frontiers are deemed as interstate supplies.
Understanding IGST
The goods and services tax (GST) divides all sales into two types of transactions — interstate and intrastate.
Imports are treated as interstate sales, which means that they’re subject to integrated tax, or IGST. That
means when you import products, you pay one IGST rate to the central government. The money is then split
between the central and your state government, which is considered on the basis of the place of supply. That
way, you don’t need to worry about paying separate state and central taxes.
Section 5(1) of the IGST act provides for circumstances when IGST would be applicable. It states IGST is
charged on all interstate supplies (goods or services or both) except the supply of alcoholic liquor for home
consumption. Provided IGST on imported goods is charged:
and collected according to the provisions of section 3 of the Customs Tariff Act, 1975 and
on such a value as is decided under tariff act at a time when duties of customs are charged on
such goods under Customs Act 1962.
The above provision suggests that IGST is collected and paid only along with customs duty. In other words,
it cannot be collected anytime before. Custom duty is collected and paid only at the time goods clear
customs frontier.
Thus, IGST on import of goods is charged in addition to the Basic Customs Duty (BCD). BCD is charged on
goods that are imported into Indian territories under the Custom Tariff Act.
Further, in addition to IGST and BCD, GST Compensation Cess is also charged on certain luxury and
demerit goods under the GST ( Compensation to States) Cess act, 2017.
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How are IGST and Cess Levied on Imported Goods?
IGST is charged on goods imported into India in addition to the Basic Custom Duty. Hence, the value of
goods for calculating IGST is taken as:
Value of Goods for Calculating IGST = the Assessable Value of Goods + Basic Customs Duty + Any
Other Duty Chargeable on the Goods in Question under any Law for the time being in force
Similarly, the value of goods on which GST Cess is calculated is:
Value of Goods for Calculating GST Cess = the Assessable Value of Goods + Basic Customs Duty + Any
Other Duty Chargeable on the Goods in Question under any Law for the time being in force
As you can see, IGST is not added to the assessable value of goods for calculating GST Cess.
Value of Goods for Calculating IGST and Compensation Cess = the Assessable Value of Goods + Basic
Customs Duty + Any Other Duty Chargeable on the Goods in Question under any Law for the time being in
force + Anti Dumping Duty + Safeguard Duty
Is IGST Levied on Passenger Baggage?
Passenger Baggage is not subject to IGST and Compensation Cess. That is, full exemption is provided from
IGST on passenger baggage. However, Basic Custom Duty at the rate of 35% is charged. Further, education
cess is also applicable on a value over and above the duty free allowances provided under Baggage Rules,
2016.
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IGST on Goods that are Imported into India, Stored into a Warehouse
and are Sold While in the Warehouse Before Clearance from Customs
According to the Customs Tariff Act 1962, goods can be removed from the custom station to warehouse
without payment of duty. The importer can deposit the goods at the customs designated warehouses from the
custom station with no payment of duty.
The tariff act has been modified to include ‘warehouse’ in the definition of the ‘custom area’.
Section 2(11) of the Customs Tariff Act defines ‘Customs Area’ as “an area of custom station. It includes
any area in which imported goods or export goods are kept before clearance by customs authorities.
Customs further include warehouse.”
Section 13 of the Tariff act defines ‘customs station’. It includes “any customs port, customs airport,
international courier terminal, foreign post office or land customs station.
However, these warehoused goods could be transferred from importer to any other person. This sale or
transfer may take place at a price higher than the assessable value of these goods. Now, the transaction of
such a nature would be deemed as supply. And, therefore, would be taxed under IGST act, 2017.
As mentioned above, any supply of imported goods before such goods cross the custom frontiers are taken
as interstate supplies. Therefore, warehoused goods sold to another person by the importer would be charged
IGST.
IGST on High Sea Sales
It is important to know what constitutes High Sea Sales before understanding the applicability of GST on
such sales. High Sea Sales mean sales undertaken by the original importer to a third person while the goods
are still on the high seas. This includes the sales that take place after the goods have left the port of loading
and before they reach the port of arrival.
This means that goods are sold by the original importer before such goods enter the custom frontiers for
clearance. That is, the title of goods is transferred to the third person. Therefore, it is the third person who
files custom declaration, that is the Bill of Entry, after the High Sea Sales are undertaken by the importer.
And IGST is charged and collected only when the import declaration is filed by the third person before
customs authorities for customs clearance. Any value addition to such a high sea sale would be included in
the value of goods on which IGST is calculated.
However, the ITC of Compensation Cess can be used only for the payment towards Compensation Cess.
Further, as per IGST act, the place of supply of imported goods is taken as the location of the importer.
Thus, if importer is located in Maharashtra, the state tax portion of the IGST is given to the State of
Maharashtra.
Import of Services
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The IGST act 2017 defines import of services as supply of any service where the:
This implies that any import of service that takes place without consideration is not considered as supply. It
is not necessary that an import of service in exchange of consideration is done for the furtherance of a
business.
Case II: Import of Services by a Taxable Person from a Related or
Distinct Person
Say there is an import of service by a taxable person from a related or distinct person as defined in section
25 of CGST act, 2017. Further, such an import of service is in furtherance of business and may or may not
be undertaken for a consideration. Such an import of service is considered as a supply.
This is done to make sure that importer is not required to pay IGST while removing goods from custom
station to warehouse.
STATE GST(SGST)
1. What is SGST?
SGST is one of the tax components of GST in India. SGST Act expands to State Goods and Service Tax.
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It is one of the three categories under Goods and Service Tax (CGST, IGST and SGST) with a concept of one
tax one nation. SGST falls under State Goods and Service Tax Act 2017.
A simple understanding could be that, when SGST is being introduced, the present state taxes of State Sales
Tax, VAT, Luxury Tax, Entertainment tax (unless it is levied by the local bodies), Taxes on lottery, betting and
gambling, Entry tax not in lieu of Octroi, State Cesses and Surcharges in so far as they relate to supply of goods
and services etc. are subsumed into one tax in GST called State GST.
All the tax proceeds collected under the head SGST is for State Government.
Intra-State supply of goods or services is when the location of the supplier and the place of supply i.e.,
location of the buyer are in the same state. In a transaction involving supply within the state, a seller has to
collect both CGST and SGST from the buyer. The Central GST gets deposited with Central Government and
State GST gets deposited with State Government.
Inter-State supply of goods or services is when the location of the supplier and the place of supply are in
different states. Also, in cases of export or import of goods or services or when the supply of goods or
services is made to or by a SEZ unit, the transaction is assumed to be Inter-State. In an transaction involving
supply between two states or outside the state, a seller has to collect IGST from the buyer.
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4. Case study to understand CGST, SGST and IGST
A trader in Indore is selling a Printer worth Rs. 10,000 to a trader in Bhopal. The CGST for this transaction will
be 14% whereas the SGST will be 14%. The trader will have to charge Rs. 1,400 as CGST and Rs. 1400 as
SGST from the trader in Bhopal and the respective amounts will be deposited in the Central and State
Government accounts.
Now, the trader from Bhopal (in the given example) is supplying this printer to his shop in Bengaluru. As this is
an inter-state trade, the Bhopal shop keeper will charge IGST of 28% i.e. Rs. 2800 on the basic value of the
product (Rs. 10,000) from his Bengaluru shop and deposit the IGST amount into the government account.
Meaning of SGST
On this blog we have already talked about GST – Introduction and Working and this article is
based on State Goods and Services Tax, which is one of the 3 categories under Goods and
Services Tax (CGST, IGST and SGST) with a concept of one nation one tax.
It falls under the State Goods and Services Tax Act, 2017.
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It is levied on the Intra State movement of goods and services. The revenue collected under
State Goods and Services Tax is for the State Government. However, Input Tax Credit on it is
given partly to the Centre and partly to the States as it will be utilized against the payment of both
SGST and IGST.
Example
The above stated example shows how the taxes would be collected by both the centre and by the
state. Both CGST and SGST will be applicable on a single transaction.
In case you are confused about GST as a business owner, feel free to consult the GST experts at
LegalRaasta. You can get comprehensive assistance on GST Registration and GST Return
Filing. You can also use our GST software for doing end-to-end GST compliance.
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POWER OF CENTRAL GOVERNMENT TO LEVY TAX
ON INTERSTATE TAXABLE SUPPLY
How will Inter State Transactions be affected with the advent of GST? This is the basic question
which is hovering over common man’s mindset these days.
Will the situation be favourable or more adverse? Whether Rate to be increased/ decreased? Who
will levy the tax- Centre or State? Will State’s Revenues be reduced?????
This article will help you in getting answers to these basic questions. Firstly, we look at the
‘Present Indirect Tax Structure’ in India.
INTER STATE TRANSACTIONS- PRESENT SITUATION
1. INTER STATE Power to levy Sales Tax on Power to levy Service tax on
TRANSACTIONS Inter State Transactions vests Inter State Transactions
with the Union Government. vests with the Union
Government.
2. INTRA STATE Power to levy Sales Tax on Power to levy Service tax on
TRANSACTIONS Intra State Transactions vests Intra State Transactions
with respective State vests with the Union
Governments. Government.
Now it is quite clear that the State Government has no role to play as far as Service Tax is
concerned. Only the Central Government can levy Service Tax whether the Service is rendered
within the State or outside it.
One more point, Sales Tax is segregated between the Centre and States for Interstate and Intra
State Transactions. Only one Government can levy the Sales Tax. No question of Sales Tax levy
by Dual Governments is present.
Goods Imported in India are subject to Import Duty under the Customs Act, 1962. Revenue goes
to the Union Government. State Governments are not entitled to any part of the Import Duty
anyhow.
Services Imported in India are taxable through ‘Reverse Charge Method’. It means Tax is paid by
the Service Recipient at the time of Import of Service. Usually, it is the Service Provider who pays
the Service Tax. Since, power of levy vests with the Centre, situs (place of provision) is not an
issue here.
DETERMINANT FACTORS FOR INTER STATE TRANSACTIONS UNDER GST
How to determine whether a Transaction is an Inter State Supply or not depends upon some
factors -:
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services both) services.
GST is levied on destination or consumption principle. So, determining the place of supply is very
important as tax revenue accrues to the State where supplies occur or deemed to occur.
Like other countries, in India also a set of Rules (Place of Supply Rules) will be prescribed for
defining the ‘Place of Taxation’ or ‘Place of Supply’. These Rules will help in determining the place
where the supply of goods or services will take place plus whether the supplies are interstate or
intra state. A Supply is taxable in a given jurisdiction only if the supply is considered to take place
in that particular jurisdiction.
Factors determining jurisdiction for supply of Services or Intangible Property:
Place of performance of service
Place of enjoyment of service/intangible property
Place of residence/location of recipient
Place of residence/location of supplier
Services with Own Set of Rules for fixation of situs:
Immovable Property services e.g., services of estate agents or architects
Banking & other financial services
Transport of goods by road
Business auxiliary and event management services
Advertisement given on PAN India basis in print or electronic form.
Special Rules for Mobile Services (no fixed place of performance or enjoyment):
Passenger travel services
Freight transportation services
Telecommunication services
Motor vehicle lease rentals
E-commerce transactions
Software development through electronic mode
Supply of goods during transportation
For the above mentioned mobile services, Special rules may be designed to yield best results.
More certainty and clarity is assured in situations where place or location or residence of the
supplier or recipient is not clearly defined at the time of supply.
POSSIBLE PLACE OF TAXATION :
1.BUSINESS TO BUSINESS (B2B) – : Place of destination is normally the place where the
recipient is established or located.
2. BUSINESS TO CUSTOMER (B2C) – :
Tangible Supplies: Place of destination could be the place where the supplier is located or
established, which is generally the place where the service is performed. E.g., haircuts, hotel
accommodation, local transport, entertainment services.
Intangible/Mobile Supplies: Place of supply could be the place of residence of the customer or the
place where services are used or enjoyed. E.g., telecommunication, e-commerce services.
Now for proper application of sub national tax on inter state supplies of goods & services, suitable
mechanism is required. Instead of zero rating of inter state supplies, preferred approach is
required.
Various models are adopted by other countries for inter state transactions. Instead of discussing
all the models in detail & zero rating of inter state transactions; our focus will be on IGST
(Integrated Goods & Services Tax) Model. This is the ideal model for our country. IGST model
envisage levy of IGST by the Centre on all transactions during inter state taxable supplies.
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Features of IGST Model:
Seller of the origin state will charge IGST (CGST+SGST) on inter state transactions.
Inter state seller will now able to pay net IGST after utilising credit of input CGST & SGST.
Inter state buyer will also avail input tax credit for payment of his own IGST, CGST or SGST on
the basis of tax invoice.
Both buyer & seller shall report these transactions in their e-returns.
Amount paid by the seller in his State along with input tax credit claimed by him will be remitted by
the Central Agency to the buying state. This mechanism is required to maintain GST a destination
based tax.
B2B transactions will be able to get input tax credit without any break till it reaches the final
consumer.
IGST Model permits cross utilisation of credit of IGST, CGST & SGST for paying IGST unlike intra
state supply where CGST/SGST can be utilised only for paying CGST/SGST respectively. It would
meet the objective of providing seamless credit chain to taxpayer across states.
This model obviates the need for refunds to exporting dealers as well as the need for every state
to settle account with another state. Exporting state will transfer to the Centre the credit of SGST
used for payment of IGST. The Centre will transfer to the importing state the credit of IGST used
for payment of SGST. Now, finally the Central Government will act as a clearing house for all the
states through transfer of funds.
Illustration for IGST Model:
Mr. A is based in Maharashtra & Mr. B is based in Gujarat. Mr. A supplied goods to Mr. B and paid
17% IGST. Mr. A has Input credit of CGST 8% and SGST 8% from local purchases made by him.
Now, Mr. A is required to pay only 1% IGST to the Central Government. He will be able to utilise
input credit of 16% for paying IGST. Maharashtra will transfer to Centre 8% SGST used for
payment of IGST.
Mr. B who had purchased those goods supplied the same locally to Mr. C who is also based in
Gujarat. Now he is liable for SGST 10% and CGST 8 %. He will utilise credit of IGST of 17% first
for CGST 8% and 9% for SGST. He will be required to pay 1% in cash.
Gujarat Government is entitled to SGST since it is the destination state. Centre will transfer 9%
IGST credit used for payment of SGST to Gujarat.
Points to Remember:
1. Maharashtra Government will not get any tax anyhow since it is inter state supply from
Maharashtra to Gujarat.
2. Central Government will get 9 % IGST (8% from Maharashtra & 1% paid in cash by Mr. A) on
inter state supply of goods to Gujarat.
3. Gujarat Government will get 10 % SGST (9% from Central Government & 1 % paid in cash by
Mr. B) for intra state supply of goods.
4. B (based in Gujarat) has been allowed full credit of IGST paid by Mr. A (based in Maharashtra)
of 17%.
Key Enablers of IGST:
Common e – Return for CGST, SGST & IGST
Uniform e – Registration
Common periodicity of returns for a class of dealers
Uniform cut-off date for filing of returns
Effective fund settlement among Centre & States.
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System based validations on ITC availed, tax refunds
Extensive Computerisation & strong IT infrastructure
National Agency
Trained and well equipped staff
Issues to be considered by the Government:
1. Specific provisions for determining nature of activity (whether the transaction is a sale or
service) are required.
2. For ascertaining consideration price of sale, specific rules are necessary. E.g., sometimes
freight element in a transaction of sale to other state is more than the base price of goods. Now
the confusion is whether freight element is part of sale or service.
3. Provisions are also required to allow inter GST set off between CGST & SGST of input tax. This
will avoid cascading effect of taxes.
4. Whether exemption in respect of import sale and high seas sales u/s 5(2) of the CST Act will be
continued or not?
5. Whether exemption to penultimate exports will be continued?
6. Whether exemption on subsequent sales u/s 6(2) of the CST Act will be continued?
7. Provisions are also required for sale or purchase of goods declared by Parliament to be of
special importance in interstate trade or commerce.
8. Rules are required for determination of value in case of transfer of goods to branches/
consignment agent/ inter related parties.
9. Measures are also required to avoid litigation which may arise due to fixation of situs. Revenue
sharing arrangements among the states on inter state transactions are to be prescribed.
Above issues need to be resolved before GST is to be implemented. ‘Prevention is better than
cure’ – same goes with GST. Every phase is to be looked seriously plus the ultimate consumer is
not to be penalised anyhow. Then only, reform will be successful.
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2008 to 5% did not have any effect on inflation, thereby reducing tax revenue
collection.
According to Wall Street firm Goldman Sachs in a note ‘ India: question and answer
on GST growth impact could be muted’, has put out estimates that the Modi
governments GST model will not raise growth, will push consumer price inflation and
may result in increased tax revenue collection[2].
There is less revenue collection under GST in the short term as can be deduced
from the fact that within four months after the roll out of the GST states are facing a
revenue shortfall of over Rs.39,111 crore and the revenue shortfall for the full fiscal
year could be closer to Rs.90,000 crore against the estimated Rs.55,000 crore as
said by Amit Mishra(West Bengal Finance Minister) while addressing the annual
general meeting of FICCI[3].
The centre has agreed to compensate the manufacturing states for any deficit in
their revenue for the period of five years. However, in case states revenue still fall
short after the period of five years who will borne the deficit occurred by the states
and such compensation also destabilize the centre’s budget.
As per Section 4 of the said Act, financial year 2015-16 has been taken as the base year for calculating
compensation amount payable to States for loss of revenue during transition period. The projected nominal
growth rate of revenue subsumed for a state during the transition period shall be 14% per annum.
Introduction
GST Council has approved a bill for State compensation for revenue loss arising out of GST in the
country.A bill called Goods and Services (State compensation for loss of revenue) bill shall provide
for compensation to the states for loss of revenue arising on the account of implementation of the
Goods and Services Tax for a period of 5 Year as per section 18 of the Constitution Act.
States will receive provisional compensation from Centre for loss of revenue from implementation
of GST in each quarter but the final annual number would be decided only after an audit carried
out by CAG. The compensation would be met through the levy of a cess called ‘GST
Compensation Cess’ on luxury items and sin goods like tobacco, for the first 5 years. Any excess
amount after the end of 5-year tenure in the ‘GST Compensation Fund’ so created, would be
divided between Centre and states.
Half of the excess amount would go to the Consolidated fund of India and would form part of the
overall tax kitty, which as per statute, is divided in a fixed proportion between the Centre and
states. The remaining 50% would be disbursed among the states in the ratio of their total revenues
from SGST in the last year of the transition period.
If any compensation paid to a state is found to be in excess of the amount actually due to them
after the Comptroller and Auditor General (CAG) audit, it would be adjusted against next year’s
compensation.
The loss of revenue to a state will be computed by the difference between the actual realization to
a state under Goods and Services Tax (GST) regime and the tax revenue it would have got under
the old indirect tax regime after considering a 14 % increase over the base year of 2015-16.
Any compensation paid to a state found to be in excess of the amount actually due to them after
the Comptroller and Auditor General (CAG) audit would be adjusted against next year’s
compensation, the draft law said. The loss of revenue to a state will be the difference between the
actual realization to a state under Goods and Services Tax (GST) regime and the tax revenue it
would have got under the old indirect tax regime after considering a 14 percent increase over the
base year of 2015-16.
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1. UTGST full form and UTGST meaning
The UTGST Act expands to Union Territory Goods and Service Tax.
UTGST, the short form of Union Territory Goods and Services Tax, is nothing but the GST applicable on the
goods and services supply that takes place in any of the five territories of India, including Andaman and Nicobar
Islands, Dadra and Nagar Haveli, Chandigarh, Lakshadweep and Daman and Diu called as Union territories of
India.
Union Territory GST will be charge in addition to the Central GST (CGST)
2. What is UTGST?
The reason behind UTGST applicability in GST is that the common State GST (SGST) cannot be applied in an
Union Territory without legislature.
To address this issue, GST Council has decided to have Union Territory GST Law (UTGST) which would be at
par with SGST. However, SGST can be applied in Union Territories such as New Delhi and Puducherry, since
both have their individual legislatures, and can be considered as “States” as per GST process.
Chandigarh
Lakshadweep
Daman and Diu
Dadra and Nagar Haveli
Andaman and Nicobar islands
For Supply of goods and/or services within a state (Intra-State): CGST + SGST;
For Supply of goods and/or services within Union Territories (Intra - UT): CGST + UTGST;
For Supply of goods and/or services across States and/or Union Territories (Inter-State/ Inter-UT): IGST
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6. UTGST Rates
Union Territory GST contains same tax rates of 0%, 5%, 12%, 18% and 28%. Tax exemption criteria for goods
and services decided by the government for SGST will be same for UTGST.
Tax need not be paid on these supplies. Input tax credit attributable to exempt supplies will not be available
for utilization/setoff.
*Zero-rated supplies such as exports would not be treated as supplies taxable at ‘NIL’ rate of tax;
Central or the State Governments are empowered to grant exemptions from GST. Conditions are:
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1. Exemption should be in public interest
2. By way of issue of notification
3. Must be recommended by the GST Council
4. Absolute exemption or conditional exemption may be for any goods and / or services
of any specified description.
5. Exemption by way of special order (not notification) may be granted exceptional
circumstances.
6. Registered person supplying the goods and / or services is not entitled to collect tax
higher than the effective rate, where the supply enjoys an absolute exemption.
Classification of Exemptions:
Supplier may be exempt – Exemption to the person making supplies-i.e supplier, regardless of the nature of
outward supply.
Ex: Services by Securities and Exchange Board of India, Services by Charitable entities.
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Certain Supplies may be exempt –Certain supplies due to their nature and type are exempted from GST. All
supplies that are notified would be eligible for the exemption. Here, irrespective of who the the supplier is,
exemption is allowed. not very much relevant.
Ex: Services by way of sponsorship of sporting events, Services by way of public conveniences
Types of Exemptions:
Absolute exemption: Exemption without any conditions.
Ex: Transmission or distribution of electricity by an electricity transmission or distribution utility, Services
by Reserve Bank of India.
Conditional Exemption: Exemption subject to certain conditions.
Ex: Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or
lodging purposes, having declared tariff of a unit of accommodation less than ` 1000/- per day”.
Conditional or partial exemption:
Intra-State supplies of goods and/or services received from an unregistered person by a registered person is
exempted from payment of tax under reverse charge provided the aggregate value of such supplies received
by a registered person from all or any of the suppliers does not exceed ` 5000/- in a day.
Hence, securities include all of the above the purpose of STT levy that are traded on recognized stock
exchange. Off-market transactions are out of the purview of STT.
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day traded shares
* Please referRule 3 of Securities Transaction Tax Rules, 2004 for the manner of determining value of
taxable equity or Equity oriented mutual fund transactions.
When STT levy was introduced in 2004, simultaneously new Section 10(38) was introduced to benefit
taxpayers who would incur STT. As per Income-tax Law, for transactions undertaken until 31 March 2018,
any capital gain on sale of shares or equity oriented mutual fund units (EOMF) which are subject to STT is
taxed at beneficial/Nil rate. While long term capital gain (if shares or EOMF are held for > 12 months) are
exempt from tax, short term capital gain on such securities are taxed at concessional rate of 15%.
However, in order to prevent abuse of exemption provisions by certain persons for declaring their
unaccounted income as exempt long-term capital gains by entering into sham transactions, Finance budget
2018 proposed to withdraw the exemption on long term capital gain and tax long term capital gains on
equity shares and EOMF at concessional rate of 10% with respect to transfer effected on or after 1 April
2018. However, gains accrued till 31 January 2018 are grandfathered i.e., in case of transfers upto 31
January 2018, cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by
fair market value as on 31st January 2018.
UNIT V
CUSTOM LAW
LEGISLATIVE BACKGROUND OF THE LEVY PORTS-WAREHOUSE-
NATURE AND RESTRICTIONS ON EXPORTS AND IMPORTS-LEVY,
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EXEMPTION AND COLLECTION ON CUSTOMS, DUTIES AND
OVERVIEW OF LAW AND PROCEDURE - CLEARANCE OF GOODS
FROM THE PORT, INCLUDING BAGGAGE - GOODS IMPORTED OR
EXPORTED BY POST AND STORES AND GOODS IN TRANSIT - DUTY
DRAWBACKS PROVISIONS, AUTHORITIES - POWERS AND
FUNCTIONS AND SEZ UNITS.
INTRODUCTION
Custom Duty is an indirect tax, imposed under the Customs Act formulated in 1962. The
power to enact the law is provided under the Constitution of India under the Article 265,
which states that ―no tax shall be levied or collected except by authority of law‖. Entry No.
83 of List I to Schedule VII of the Constitution empowers the Union Government to legislate
and collect duties on import and exports. The Customs Act, 1962 is the basic statute which
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governs entry or exit of different categories of vessels, aircrafts, goods, passengers etc., into
or outside the country. The Act extends to the whole of the India. Customs Act, 1962 just
like any other tax law is primarily for the levy and collection of duties but at the same time it
has the other and equally important purposes such as: (i) regulation of imports and exports;
(ii) protection of domestic industry; (iii) prevention of smuggling; (iv) conservation and
augmentation of foreign exchange and so on. Section 12 of the Custom Act provides that
duties of customs shall be levied at such rates as may be specified under the Customs Tariff
Act, 1975 or other applicable Acts on goods imported into or exported from India.
There are four stages in any tax structure, viz., levy, assessment, collection and
postponement. The basis of levy of tax is specified in Section 12, charging section of the
Customs Act. It identifies the person or properties in respect of which tax or duty is to be
levied or charged. Under assessment, the liability for payment of duty is quantified and the
last stage is the collection of duty which is may be postponed for administrative
convenience. As per Section 12, customs duty is imposed on goods imported into or
exported out of India as per the rates specified under the Customs Tariff Act, 1975 or any
other law.
(i) Customs duty is imposed on goods when such goods are imported into or exported out of
India;
(ii) The levy is subject to other provisions of this Act or any other law;
(iii) The rates of Basic Custom Duty are as specified under the Tariff Act, 1975 or any other
law;
(iv) Even goods belonging to Government are subject to levy, though they may be exempted
by notification(s) under Section 25. Custom Tariff Act, 1975 has two schedules. Schedule I
prescribes tariff rates for imported goods, known as ―Import Tariff‖ and Schedule II
contains tariff for export goods known as ―Export Tariff.
WAREHOUSING
w.e.f. 14-5-2016, As per Section 2(43) of the Customs Act, 1962, “warehouse” means a
public warehouse licensed under section 57 or a private warehouse licensed under section 58
OR Special Warehouse license u/s 58A.
Features of Warehousing:
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1. Importer can defer payment of import duties by storing the goods in a safe place
2. Importer allowed doing manufacturing in bonded warehouse and then re-exporting from it.
3. The importer can be allowed to keep the goods up to One year without payment of duty
from the date he deposited the goods into warehouse.
4. This time period is extended to Three years for Export Oriented Units and the time period
still be extended to Five years if the goods are capital goods.
5. The importer minimizes the charges by keeping in a warehouse, otherwise the demurrage
charges at port is heavy.
9. Green Bill of Entry has to be submitted by the importer to clear goods from warehouse for
home consumption.
10. Rate of duty is applicable as on the date of presentation of Bill of Entry (i.e. sub-bill of
entry or ex-bond bill of entry) for home consumption.
11. Reassessment is not allowed after the imported goods originally assessed and
warehoused.
12. The exchange rate is the rate at which the Bill of Entry (i.e. ‘into bond’) is presented for
warehousing.
13. If the goods which are not removed from warehouse within the permissible period, then
subsequent removal called as improper removal. The rate of BCD which is applicable as on
the last date on which the goods should have been removed but not removed is applicable,
[Kesoram Rayon v Commissioner of Customs (1996)].
w.e.f. 14-5-2016:
(1) Section 59 of the Customs Act, 1962, Bond amount has been increased from twice of the
duty amount to thrice of the duty amount and security also will have to be given.
(2) Now, rent charges claimable will not be pre-requisite for non- compliances of any of the
provisions, since it is the issue of custodian i.e. owner of the warehouse.
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Licensing of Public Warehousing:
Sec. 58A (1) The Principal Commissioner of Customs or Commissioner of Customs may,
subject to such conditions as may be prescribed, license a special warehouse wherein
dutiable goods may be deposited and such warehouse shall be caused to be locked by the
proper officer and no person shall enter the warehouse or remove any goods therefrom
without the permission of the proper officer.
Sec. 58A (2) The Board may, by notification in the Official Gazette, specify the class of
goods which shall be deposited in the special warehouse licensed under sub-section (1).
The terms "Prohibited Goods" have been defined in sub-section 33 of Section 2 of the Customs Act
as meaning "any goods the import or export of which is subject to any prohibition under the
Customs Act or any other law for the time being in force"
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Under section 11 of the Customs Act, the Central Government has the power to issue Notification
under which export or import of any goods can be declared as prohibited. The prohibition can either
be absolute or conditional. The specified purposes for which a notification under section 11 can be
issued are maintenance of the security of India, prevention and shortage of goods in the country,
conservation of Foreign Exchange, safeguarding balance of payments etc. The Central Govt. has
issued many notifications to prohibit import of sensitive goods such as coins, obscene books, printed
waste paper containing pages of any holy books, armored guard, fictitious stamps, explosives,
narcotic drugs, rock salt, saccharine, etc.
Under Export and Import Policy, laid down by the DGFT, in the Ministry of Commerce, certain goods
are placed under restricted categories for import and export. Under section 3 and 5 of the Foreign
Trade (Development and Regulation) Act, 1992, the Central Government can make provisions for
prohibiting, restricting or otherwise regulating the import of export of the goods. As for example,
import of second hand goods and second hand capital goods is restricted. Some of the goods are
absolutely prohibited for import and export whereas some goods can be imported or exported
against a licence. For example export of human skeleton is absolutely prohibited whereas export of
cattle is allowed against an export licence. Another example is provided by Notification No.44(RE-
2000) 1997 dated 24.11.2000 in terms of which all packaged products which are subject to provisions
of the Standards of Weights and Measures (Packaged Commodities) Rules, 1997, when
produced/packed/sold in domestic market, shall be subject to compliance of all the provisions of the
said Rules, when imported into India. All packaged commodities imported into India shall carry the
name and address of the importer, net quantity in terms of standard unit of weights measures,
month and year of packing and maximum retail sale price including other taxes, local or otherwise.
In case any of the conditions is not fulfilled, the import of packaged products shall be held as
prohibited, rendering such goods liable to confiscation.
Another restriction under the aforesaid Notification issued by the Ministry of Commerce is that the
import of a large number of products, presently numbering 133, are required to comply with the
mandatory Indian Quality Standards (IQS) and for this purpose exporters of these products to India
are required to register themselves with Bureau of Indian Standards (BIS). Non-fulfillment of the
above requirement shall render such goods prohibited for import.
Import and export of some specified goods may be restricted/prohibited under other laws such as
Environment Protection Act, Wild Life Act, Indian Trade and Merchandise Marks Act, Arms Act, etc.
Prohibition under those acts will also apply to the penal provisions of the Customs Act, rendering
such goods liable to confiscation under section 111(d) of the Customs Act (for import) and 113 (d) of
the Customs Act (for export).
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Any Importer or Exporter for being knowingly concerned in any fraudulent evasion or attempted
evasion of any prohibition under the Customs Act or any other law for the time being in force in
respect to any import or export of goods, shall be liable to punishment with imprisonment for a
maximum term of three years (seven years in respect of notified goods) under section 135 of the
Customs Act. Any person who is reasonably believed to be guilty of an offence, punishable under
section 135, may be arrested under the provisions of section 104 of the Customs Act.
Keeping in view the above penal provisions in the Customs Act to deal with any deliberate evasion of
prohibition/restriction of import of export of specified goods, it is advisable for the Trade to be well
conversant with the provisions of EXIM Policy, the Customs Act, as also other allied Acts. They must
make sure that before any imports are effected or export planned, they are aware of any
prohibition/restrictions and requirements subject to which alone goods can be imported/exported,
so that they do not get penalised and goods do not get involved in confiscation etc. proceedings at
the hands of Customs authorities.
Customs Duty
Goods are imported in or exported from India through sea, air or land. Goods may even come
through post parcel or as baggage when passengers travel in and out of the country. The Customs
Act was formulated in the year 1962 to prevent the illegal import and export of goods. Moreover,
all imported goods are subject to the duty to affording protection to indigenous industries as well
as to keep the imports to a minimum in the interests of Indian companies and to secure the
exchange rate of the Indian currency. In this article, we look at customs duty in India in detail.
Specific Duties
A Specific Custom Duty is a kind of duty imposed on every unit of a commodity imported or
exported. For example, INR 10 on each metre of cloth imported or INR 1,000/- on each TV set
imported. In these cases, the value of the commodity is not taken into consideration.
Ad Valorem Duties
Ad Valorem is the Latin for ‘According’ to the ‘Value’ or ‘Worth’. Ad Valorem custom duty is a duty
imposed on the total value of a commodity imported or exported. For example, 10 per cent of the
F.O.B value of cloth imported or 20 per cent of the C.I.F value of TV sets imported. In the case of
Ad Valorem custom duty, the physical units of commodity are not taken into consideration.
Therefore it is the method of charging duty, tax, or fee according to the value of the goods and
services, instead of by a fixed rate, or by the weight or the quantity.
Compound Duties
Compound custom duty is a combination of specific and Ad Valorem custom duties. In this case,
the quantity, as well as the value of the commodity, is taken into consideration while computing
tariff.
The Central Government can grant exemptions by issuing a notification. Capital goods and
spares can be imported under “project imports” at concessional/ Nil rate of customs duty.
Section 25 of the Customs Act authorises the Central Government to issue notification
granting exemption from customs duty partially or wholly on any goods.
The exemptions may be in respect of primary duty or auxiliary duty.
General or specific exemptions may be granted. While general exemptions are in respect to
the user of goods, specific exemptions are in respect of various products.
The exemptions are also granted subject to fulfilment of certain conditions.
Types of Exemptions
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The following are the types of exemptions from Customs Duty.
1. By notification
2. By particular order on the Adhoc basis
3. General exemptions
4. Exemptions to Oil and Natural Gas Corporations Limited (ONGC)/ Oil India Limited (OIL)
5. Other exemptions
1. Price at which such or like goods are ordinarily sold or offered for sale.
2. Price for the delivery at the time and place for importation or exportation.
3. Price should be in the course of International Trade.
4. Seller and buyer have absolutely no interest in the business of each other, or one of them
has no interest in the other.
5. Price should be sole considerations for sale or offer for sale.
6. The rate of exchange as appropriate on the date of presentation of Bill of Entry as fixed by
CBE&C (Board) by Notification should be considered. This criterion is entirely appropriate
for valuing export goods. However, in the case of import goods valuation is required to be
done according to valuation rules as stated in Chapter 6 Para 5 of the CBE & C’s Customs
Manual, 2001.
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The Customs Tariff Act of 1975
The Customs Tariff Act of 1975 contains two schedules. Schedule-1 gives the classification and
rate of duties for imports. On the other hand, Schedule-2 gave classification and rated of duties
for exports. In addition to these two schedules, the Customs Tariff Act makes provisions for duties
like additional duty (CVD), special duty, anti-dumping duty and protective duties.
Note: The Customs Act of 1962 regulates the levy of duties of customs while the Customs Tariff
Act of 1975 fixes the rates of the taxes.
1. The Customs Valuation Rules of 1988: For the valuation of imported goods for calculating
duty payable.
2. The Customs and Central Excise Duties Drawback Rules of 1995: The mode of calculating
rules of duty drawback on exports.
3. Re-export of Imported Goods
4. Baggage Rules of 1998: This stated the rules and allowances for bringing in baggage from
abroad by Indian and tourists who visited the country. Duty-free baggage allowance carried
by an international passenger, when coming to India is INR 50,000/- per individual. Before
the 31st of March, 2016, the amount was INR 45,000/-. With effect from the First of April,
2016, all international passengers travelling to India need not file declarations if not
carrying dutiable goods as part of the baggage they bring along with them.
5. Customs Rules of 1996: This states the import of goods at a concessional rate of duty for
manufacture of excisable goods. It also provides the procedure to be followed when goods
are imported into India for export purposes.
Other Specifics
Notifications under the Customs Act
Various sections authorise the Central Government to issue notifications. The main sections have
been stated below.
1. Section 25(1): This section is to grant partial or full exemption from the duty, and Section
11 states the prohibition of import or export of goods.
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2. Other sections are: A few of the other sections are ones like Section 11B that specifies
notified goods and Section 11-I that determines specific goods.
Board Circulars
Central Bureau of Indirect Taxes and Customs is empowered under Section 151A of the Customs
Act. The Bureau has the power to issue instructions, and directions to the officers of customs and
they are required to observe and follow, This is for uniformity in the classification of goods or
concerning the levy of duty.
Public Notices
The Commissioners of Customs would issue Public Notices.
Custom Duty?
Under Section 2(22), goods includes the following
Stores
Vessels, aircraft, and vehicles
Baggage
Currency and negotiable instruments
Other moveable property
The duty levied depends on the value of the goods, its dimensions and weight along with a lot of other criteria.
While value-based duties are called valorem duties, quantity-based duties are called specific duties. On the
other hand, duties on values plus other factors are called compound duties.
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Custom Duty in the country falls under the Customs Act, 1962. As per this act, the government levies duties on
both import and export of goods along with their procedures, prohibitions, penalties etc. Matters pertaining to this
duty fall under the CBEC (Central Board of Excise and Customs), a division of the Department of Revenue of the
Ministry of Finance.
The CBEC helps in formulating policies w.r.t. the collection and imposition of custom duties including custom
duty evasions, prevention of smuggling etc. It oversees the tax administration of inland and foreign travel. It has
different divisions to take care of field work such as the Commissionerate of Customs, Central Revenues
Laboratory and Directorates etc.
Basic Customs Duty: This duty is imposed on the value of goods at a specified rate as it is fixed on an
ad-valorem basis. After being amended time and again, it is currently regulated by the Customs Tariff
Act, 1975. The Central Government, however, holds the rights to exempt specific goods from this tax.
Countervailing Duty: CVD or Additional Customs Duty is levied on imported goods that fall under
Section 3 of the Customs Tariff Act of 1975. It is the same as the Central Excise Duty which is levied on
similar goods that are produced in India.
Education Cess: The cess used to be levied at 2% and an additional 1% of the aggregate of customs
duties.
Protective Duty: This duty is imposed in order to shield the domestic industry against the imports at
rates that are recommended by the Tariff Commissioner.
Safeguard Duty: As the name suggests, this duty serves as a means of safeguarding the rise in
exports. Sometimes, if the government feels that a rise in exports can damage the existing domestic
industry, it may levy this duty.
Anti-Dumping Duty: This duty is based on the dumping margin, i.e. the difference between the export
price and the normal price. It is only imposed when the goods that are imported are below the fair market
price.
Comparative Value Method: This method compares transaction values of items similar in nature (Rule
4)
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Comparative Value Method: This method compares transaction values of items similar in nature (Rule
5)
Deductive Value Method: This method uses the sale price of items in the importing country (Rule 7)
Comparative Value Method: This method uses costs related the fabrication, materials as well as profit
in the production country (Rule 8)
Fallback Method: This method is based on the earlier methods that offer higher flexibility (Rule 9)
Then, enter the import or export code or simply key in the login credentials given by ICEGATE
You will be able to check all the e-challans that are in your name
You can then select the challan which you have to pay and choose the payment method or select the
bank
The last step would be to click on the print button and save the payment copy.
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of the goods that you plan to import. You will have to enter a description of maximum 30 characters and then
select the country of origin, be it for preferential duty or antidumping. If you want to see the list of goods, then
simply click on the search tab and the list matching your criteria will appear. You can choose the right one and
then gain access to a chart loaded with relevant information. In this dynamic chart, you can enter the values to
check the exact custom duty you ought to pay.
There are other types of fee that are applicable to custom duty. Thy include:
CESS: Education + Higher Education – 3% (Duty + CEX (Education and Higher Education Cess) + CVD)
India’s Directorate General of Foreign Trade (DGFT) is the principal governing body responsible
for all matters related to EXIM Policy.
Importers are required to register with the DGFT to obtain an Importer Exporter Code
Number (IEC) issued against their Permanent Account Number (PAN), before engaging in EXIM
activities. After an IEC has been obtained, the source of items for import must be identified and
declared.
The Indian Trade Classification – Harmonized System (ITC-HS) allows for the free import of most
goods without a special import license.
Certain goods that fall under the following categories require special permission or licensing.
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1) Licensed (Restricted) Items – Licensed items can only be imported after obtaining an import
license from the DGFT. These include some consumer goods such as precious and semi-precious
stones, products related to safety and security, seeds, plants, animals, insecticides,
pharmaceuticals and chemicals, and some electronic items.
2) Canalized Items – Canalized items can only be imported via specified transportation channels
and methods, or through government agencies such as the State Trading Corporation (STC).
These include petroleum products, bulk agricultural products such as grains and vegetable oils,
and some pharmaceutical products.
3) Prohibited Items – These goods are strictly prohibited from import and include tallow fat, animal
rennet, wild animals, and unprocessed ivory.
Import Procedures
All importers must follow detailed customs clearance formalities when importing goods into India.
A comprehensive overview of EXIM procedures can be found on the Indian Directorate of General
Valuation’s website.
Bill of Entry
Every importer is required to begin by submitting a Bill of Entry under Section 46. This document
certifies the description and value of goods entering the country. The Bill of Entry should be
submitted as follows:
Under the Electronic Data Interchange (EDI), no formal Bill of Entry is required (as it is recorded
electronically) but the importer is required to file a cargo declaration after prescribing particulars
required for processing of the entry for customs clearance. Bills of Entry can be one of three types:
1) Bill of Entry for Home Consumption – This form is used when the imported goods are to be
cleared on payment of full duty. Home consumption means use within India. It is white colored and
hence often called the ‘white bill of entry’.
2) Bill of Entry for Housing – If the imported goods are not required immediately, importers may
store the goods in a warehouse without the payment of duty under a bond and then clear them
from the warehouse when required on payment of duty. This will enable the deferment of payment
of the customs duty until goods are actually required. This Bill of Entry is printed on yellow paper
and is thus often called the ‘yellow bill of entry’. It is also called the ‘into bond bill of entry’ as the
bond is executed for the transfer of goods in a warehouse without paying duty.
3) Bill of Entry for Ex-Bond Clearance – The third type is for ex-bond clearance. This is used for
clearance from the warehouse on payment of duty and is printed on green paper.
It is important to note that the rate of duty applicable is as it exists on the date a good is removed
from a warehouse. Therefore, if the rate changes after goods have been cleared from a customs
port, the customs duty as assessed on a yellow bill of entry (Bill of Entry for Housing) and paid on
the value listed on the green bill of entry (Bill of Entry for Ex-Bond Clearance) will not be the same.
Signed invoice;
Packing list;
Bill of lading or delivery order/air waybill;
GATT declaration form;
Importer/CHA declaration;
Import license wherever necessary;
Letter of credit/bank draft;
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Insurance document;
Industrial license, if required;
Test report in case of chemicals;
Adhoc exemption order;
DEEC Book/DEPB in original, where applicable;
Catalogue, technical write up, literature in case of machineries, spares or
chemicals as may be applicable;
Separately split up value of spares, components, and machinery; and,
Certificate of Origin, if preferential rate of duty is claimed.
Import Duties
The Indian government levies several types of import duties on goods. These include:
Basic Customs Duty (BCD) is the standard tax rate applied to goods, or the standard preferential
rate in the case of goods imported from specified countries.
The rates of customs duties are outlined in the First and Second Schedules of the Customs Tariff
Act, 1975.
The First Schedule specifies rates of import duty and the Second specifies rates of export duty.
BCD is divided into standard and preferential rates, with goods imported from countries holding
trade agreements with the Indian central government eligible for lower preferential rates.
Additional duties of customs, commonly referred to as the Countervailing Duty (CVD) and Special
Additional Duty of Customs (SAD), has been be replaced by the levy of the Integrated Goods and
Services Tax (IGST), barring a few exceptions, such as pan masala and certain petroleum
products. The IGST replaces the previous system of federal and state categories of indirect
taxation.
A Customs Duty calculator is made available on the online portal of excise and customs,
the ICEGATE website. There are seven rates prescribed for IGST– Nil, 0.25 percent, 3 percent 5
percent, 12 percent, 18 percent, and 28 percent. The actual rate applicable to an item will depend
on its classification and will be specified in Schedules notified under Section 5 of the IGST Act,
2017.
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Further, a few items such as aerated water products, tobacco products, and motor vehicles,
among others, will attract an additional levy of the GST Compensation Cess, over and above
IGST. The Cess is calculated on the transaction value or the price at which the goods are sold.
The Goods and Services Tax (Compensation to States) Act, 2017 was enacted to levy
Compensation Cess for providing compensation to Indian states for the loss of revenue arising on
account of implementation of the Goods and Services Tax from July 1, 2017.
The Compensation Cess on goods imported into India shall be levied and collected in accordance
with the provisions of Section 3 of the Customs Tariff Act, 1975, at the point when duties of
customs are levied on the said goods under Section 12 of the Customs Act, 1962, on a value
determined under the Customs Tariff Act, 1975.
Anti-Dumping Duty
The central government may impose an anti-dumping duty if it determines a good is being
imported at below fair market price, and an importer will be notified if this is the case.
The duty cannot exceed the difference between the export and normal price (margin of dumping).
This does not apply to goods imported by 100 percent Export Oriented Units (EOU) and units in
Free Trade Zones (FTZs) and Special Economic Zones (SEZs).
Safeguard Duty
Unlike Anti-Dumping Duty, the imposition of Safeguard Duty does not require the central
government to determine a good is being imported at below fair market price.
Safeguard Duty is imposed if the government decides that a sudden increase in exports is
causing, or threatens to cause, serious damage to a domestic industry.
A notification regarding the imposition of Safeguard Duty is valid for four years with the possibility
of being extended to 10 years.
Protective Duty
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If the Tariff Commission issues a recommendation for the imposition of a Protective Duty, the
central government may choose to impose this at a rate that does not exceed that recommended
by the Tariff Commission.
The federal government can specify the period up to which the protective duty will remain in force,
reduce or extend the period, and adjust the effective rate.
The Education Cess and Secondary and Higher Education Cess on imported goods is now
abolished and replaced by the Social Welfare Surcharge.
This surcharge will be levied at the rate of 10 percent of the aggregate duties of customs, on
imported goods.
The customs clearance process typically involves preparing documents that may be
submitted electronically or physically with the consignment. This helps concerned
authorities to calculate taxes and duties that will be levied on the cargo.
The type of documents required for customs clearance usually depends on the type of goods
being shipped. It may also vary depending on the country of origin and the destination of the
cargo. However, as a thumb rule, there are a set of general documents that most businesses
need to comply with when importing or exporting goods.
The Pro Forma Invoice documents the intention of the exporter to sell a predetermined
quantity of goods or products. This invoice is generated as per the outlined terms and
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conditions agreed upon between the exporter and the importer, through a recognised medium
of communication such as email, fax, telephone or in person. It is similar to a ‘Purchase
Order’, which is issued prior to completing the sales transaction.
The customs packing list states the list of items included in the shipment that can be matched
against the pro forma invoice by any concerned party involved in the transaction. This list is
sent along with the international shipment and is especially convenient for transportation
companies as they know exactly what is being shipped. Individual customs packing lists are
secured outside each individual container to minimise the risk of exporting incorrect cargo
internationally.
The Country of Origin Certificate is a declaration issued by the exporter that certifies that the
goods being shipped have been completely acquired, produced, manufactured or processed
in a particular country.
Customs Invoice
A customs invoice is a mandatory document for any export trade. The customs clearance
department will ask for this document first as it contains information about the order,
including details such as description, selling price, quantity, packaging costs, weight or
volume of the goods to determine customs import value at the destination port, freight
insurance, terms of delivery and payment, etc. A customs representative will match this
information with the order and decide whether to clear this for forwarding or not.
Shipping Bill
A shipping bill is a traditional report where the downside is asserted and primarily serves as a
measurable record. This can be submitted through a custom online software system
(ICEGATE). To obtain the shipping bill, the exporter will need the following documents:
Bill of Lading
Bill of Lading is a legal document issued by the carrier to the shipper. It acts as evidence of
the contract for transport for goods and products, mentioned in the bill provided by the
carrier. It also includes product information such as type, quantity, and destination that the
goods are being carried to. This bill can also be treated as a shipment receipt at the port of
destination where it must be produced to the customs official for clearance by the exporter.
Regardless of the form of transportation, this is a must-have document that should
accompany the goods and must be duly signed by the authorised representative from the
carrier, shipper, and receiver. The Bill of Lading comes in handy if there is any asset theft.
Bill of Sight
Bill of Sight is a declaration from the exporter made to the customs department in case the
receiver is unsure of the nature of goods being shipped. The Bill of Sight permits the receiver
of goods to inspect them before making payments towards applicable duties. Applying for a
bill of sight becomes necessary as it acts as a substitute document if the exporter does not
have all the must-have information and documents needed for the bill of entry. Along with
the bill of sight, the exporter also needs to submit a letter that allows for the clearance of
goods by customs.
Letter of Credit
Letter of credit is shared by the importer’s bank, stating that the importer will honour
payment to the exporter of the sum specified to complete the transaction. Depending on the
terms of payment between the exporter and importer, the order is dispatched only after the
exporter has this letter of credit.
Bill of Exchange
Bill of Exchange is an alternative payment option where the importer is to clear payments for
goods received from the exporter either on-demand or at a fixed or determinable future. It is
similar to promissory notes that can be drawn by banks or individuals. You can even transfer
a Bill of Exchange by endorsement.
Export License
Businesses must have an export license that they can provide to customs in order to export or
forward any products. This only needs to be produced when the shipper is exporting goods
to an international destination for the very first time. This type of license may vary
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depending on the type of export you intend to make. This can be done by applying with the
licensing authority, and the permit is eventually issued by the Chief Controller of Exports
and Imports.
Warehouse Receipt
Warehouse Receipt receipt is generated once the exporter has cleared all relevant export
duties and freight charges post customs clearance. This is needed only when an ICD in
involved.
Health Certificates
Health Certificate is applicable only when there are food products that are of animal or non-
animal origin involved in international trade. The document certifies that the food contained
in the shipment is fit for consumption by humans and has been vetted to meet all standards of
safety, rules and regulations prior to exporting. This certificate is issued by authorised
governmental organisations from where the shipment originates.
Although these documents are generally common submissions, additional documents may
be required in certain cases. For example, industrial license, test report, insurance certificate,
GATT declaration, registration cum membership certificate, documents for duty benefits or
central excise documents could be essential for certain types of imports.
BAGGAGE
Any baggage that you desire you send through cargo shipping will be treated as an
unaccompanied baggage. Regardless, a free allowance in such case cannot be considered in the
case of baggage clearance and is reasonably charged to the customs duty at 35% Ad valorem +
3% Education Cess. In addition to this, only personal items including items like all used items of
personal wear including shirts, suits, shoes, shoe brush & polish, blouses, sarees, undergarments,
pants, neckties, handkerchiefs, dentures, gloves, cosmetics in use, towels, toiletries, bedding,
blankets, used bedding, umbrella, walking sticks, used shoes, hair dryer, hearing aid, shaving kit,
spectacles, one watch etc. can be imported free of duty. Application of the Baggage Rules are also
extended to an unaccompanied baggage except where they have been specifically excluded from
the cargo shipment. An unaccompanied baggage must be in the personal possession abroad at
the destination of the passenger mandatorily and shall be dispatched within one month of his/her
arrival in India or within further reasonable period as and when the Deputy / Assistant
Commissioner of Customs may allow. The unaccompanied baggage may land in India two months
before the arrival of the passenger himself/herself or within such period, but under no
circumstance exceeding one year.
If you are an Indian citizen who has stayed abroad for more than two years and your short visits
to India are less than 180 days in total within the last 2 years, you are eligible to claim the
Concessional rate of duty under Transfer of Residence.
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GOODS IMPORTED OR EXPORTED BY POST AND
STORES AND GOODS IN TRANSIT
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c. providing for the transit or transhipment of baggage from one customs station to another
or to a place outside India.
Stores
85. Stores may be allowed to be warehoused without assessment to duty. - Where any imported
goods are entered for warehousing and the importer makes and subscribes to a declaration that
the goods are to be supplied as stores to vessels or aircrafts without payment of import duty
under this Chapter, the proper officer may permit the goods to be warehoused without the
goods being assessed to duty.
86. Transit and transhipment of stores. -
0. Any stores imported in a vessel or aircraft may, without payment of duty, remain on
board such vessel or aircraft while it is in India.
1. Any stores imported in a vessel or aircraft may, with the permission of the proper officer,
be transferred to any vessel or aircraft as stores for consumption therein as provided in
section 87 or section 90.
87. Imported stores may be consumed on board a foreign-going vessel or aircraft. - Any imported
stores on board a vessel or aircraft (other than stores to which section 90 applies) may, without
payment of duty, be consumed thereon as stores during the period such vessel or aircraft is a
foreign-going vessel or aircraft.
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88. Application of section 69 and Chapter X to stores. - The provisions of section 69 and Chapter X
shall apply to stores (other than those to which section 90 applies) as they apply to other goods,
subject to the modifications that-
. for the words "exported to any place outside India" or the word "exported", wherever they
occur, the words "taken on board any foreign-going vessel or aircraft as stores" shall be
substituted;
a. in the case of drawback on fuel and lubricating oil taken on board any foreign-going
aircraft as stores, sub-section (1) of section 74 shall have effect as if for the words "ninety-
eight per cent", the words "the whole" were substituted.
89. Stores to be free of export duty. - Goods produced or manufactured in India and required as
stores on any foreign-going vessel or aircraft may be exported free of duty in such quantities as
the proper officer may determine, having regard to the size of the vessel or aircraft, the number
of passengers and crew and the length of the voyage or journey on which the vessel or aircraft is
about to depart.
90. Concessions in respect of imported stores for the Navy. -
0. Imported stores specified in sub-section (3) may without payment of duty be consumed
on board a ship of the Indian Navy.
1. The provisions of section 69 and Chapter X shall apply to stores specified in sub-section
(3) as they apply to other goods, subject to the modifications that -
a. for the words "exported to any place outside India" or the word "exported"
wherever they occur, the words "taken on board a ship of the Indian Navy" shall
be substituted;
b. for the words "ninety-eight per cent" in sub-section (1) of section 74, the words
"the whole" shall be substituted.
2. The stores referred to in sub-sections (1) and (2) are the following: -
a. stores for the use of a ship of the Indian Navy;
b. stores supplied free by the Government for the use of the crew of a ship of the
Indian Navy in accordance with their conditions of service.
Provided that where the goods are being transhipped under an international treaty or
bilateral agreement between the Government of India and Government of a foreign
country, a declaration for transhipment instead of a bill of transhipment shall be
presented to the proper officer in the prescribed form .
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2. Subject to the provisions of section 11, where any goods imported into a customs station
are mentioned in the import manifest or the import report, as the case may be, as for
transhipment to any place outside India, such goods may be allowed to be so
transhipped without payment of duty.
3. Where any goods imported into a customs station are mentioned in the import manifest
or the import report, as the case may be, as for transhipment -
a. to any major port as defined in the Indian Ports Act, 1908 (15 of 1908), or the
customs airport at Mumbai, Calcutta, Delhi or Chennai or any other customs port
or customs airport which the Board may, by notification in the Official Gazette,
specify in this behalf, or
b. to any other customs station and the proper officer is satisfied that the goods are
bonafide intended for transhipment to such customs station,
the proper officer may allow the goods to be transhipped, without payment of
duty, subject to such conditions as may be prescribed for the due arrival of such
goods at the customs station to which transhipment is allowed.
55. Liability of duty on goods transited under section 53 or transhipped under section 54. - Where
any goods are allowed to be transited under section 53 or transhipped under sub-section (3) of
section 54 to any customs station, they shall, on their arrival at such station, be liable to duty and
shall be entered in like manner as goods are entered on the first importation thereof and the
provisions of this Act and any rules and regulations shall, so far as may be, apply in relation to
such goods.
56. Transport of certain classes of goods subject to prescribed conditions. - Imported goods may be
transported without payment of duty from one land customs station to another, and any goods
may be transported from one part of India to another part through any foreign territory, subject
to such conditions as may be prescribed for the due arrival of such goods at the place of
destination.
Legal Provisions
Goods that are imported through posts are classified under Chapter Heading 9804 of
the Customs Tariff Act, 1975 and the rate of duty that is applicable is charged on every good
that is allowed for importing through posts. Heading 9804 applies to goods that are permitted for
import through posts, exempted from prohibition under Foreign Trade (Development and
Regulation) Act, 1992. The goods against an import license or Customs Clearance Permit cannot
be imported through posts. Moreover, motor vehicles, alcoholic drinks and goods that are
imported through courier are not covered under Heading 9804. Goods that are imported or
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exported by posts are governed by Sections 82,83 and 84 of the Customs Act, 1962 and the
procedure requires for the clearance of goods through posts is stated in Rules regarding Postal
Parcels and Letter Packets from Foreign Ports In/ Out of India of 1953.
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addition to this, items that are not prohibited for importation under Foreign Trade (Development
and Regulation Act, 1992 can also be imported as gifts. The sender of the gift may not be residing
in the country from where the goods have been despatched and any person abroad can send gifts
to relatives, business associates, friends, companies and acquaintances. The gifts have to be for
bona fide personal use. The rule is followed so that the person receives gifts genuinely free and
the payment is mode made for it through other means. The frequency and quantity of the gifts
should not give rise to the belief that it has been used as a route in transferring money. These
gifts can be received by individuals, societies, institutions like schools and colleges and by even
corporate bodies.
Customs duty is chargeable on gift assessed over Rs. 10,000 by the Customs. For post parcels,
the department collects the assessed duty from the receiver of the gift and subsequently deposits
it with the customs.
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Conditions to Import Currencies by Post
In order to decrease the pendency and to avoid delay in clearance of mail articles, Customs may
permit the import of both Indian and foreign currencies that are received by residents by post if
the value is not more than Rs. 5,000. subjected to the conditions that are given below.
Parcels or packets containing foreign/ Indian currency, etc., valuing more than Rs. 5,000 will be
detained and adjudicated on merits and will be released on the basis of ‘No Objection Certificate’
from the RBI.
A general permit will be given to the Authorised Dealers to import currency notes from their
overseas branches/ correspondents for meeting their normal banking requirements. There is no
particular clearance required from RBI for these imports.
The boxes or bags holding the parcels shall be labelled as ‘Postal Parcel’, ‘Parcel Post’,
Parcel Mail’, ‘Letter Mail’, and will be permitted to pass at specified Foreign Parcel
Department of the Foreign Post Offices and Sub-Foreign Post Offices.
The postmaster on receipt of the parcel mail gives it to the Customs the required
documents.
The following are the required documents that have to be furnished to the Customs.
1. A memo mentioning the total number of parcels that are received from each country of
origin.
2. Parcel Bills in the form of a sheet (in triplicate) and the senders’ declaration (if available)
and any other relevant documents that may be required for examination, assessment etc
by the Customs Department.
3. The relative Customs Declarations and dispatch notes.
4. Other information that is required in connection with the preparation of the Parcel Bills that
the Post Office is able to furnish.
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Duty Drawback provisions are made to grant rebate of duty or tax chargeable on
any imported / excisable materials and input services used in the manufacture of
export goods. The duties and taxes neutralized under the scheme are
(ii) Brand Rate. The legal framework is provided under Sections 75 and 76 of the Customs
Act, 1962 and the Customs and Central Excise Duties and Service Tax Drawback Rules,
1995 (Drawback Rules, 1995) issued under the provisions of Section 75 of the Customs
Act, 1962, Section 37 of the Central Excise Act, 1944 and Section 93 A read with section 94
of the Finance Act, 1994the Finance Act, 1994.
The duty drawback scheme has been notified for a large number of export products by the
Government after an assessment of the average incidence of Customs, Central Excise duties,
Service Tax and Transaction Cost suffered by the export products. Duty Drawback Scheme aims
to provide the refund/ recoupment of custom and excise duties paid on inputs or raw materials
and service tax paid on the input services used in the manufacture of export goods. In this article,
we look at the procedure for claiming Duty Drawback of export in India.
Section 74: As per section 74, if the re-exports of imported goods, which are identified
quickly and within two years from the date of payment of duty on the importation. Then an
exporter is eligible to claim 98% of the duty paid by him as drawback under section 74.
Section 75: As per section 75, if the export of goods manufactured or processed out of
imported material with value addition, then a drawback should be allowed of duties of
customs chargeable on any imported materials of a class or description. If sale proceeds
not received within the stipulated period, a drawback is to be reversed or adjusted. Duty
Drawback under section 75 can be claimed either as a fixed percentage depending upon
the value of goods exported.
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Eligibility Criteria
The below following are the minimum criteria to claim for processing drawback claim.
Any individual must be the legal owner of the goods at the time the goods are exported.
You must have paid customs duty on imported goods.
Duty drawback is available on most goods on which customs duty was paid on importation
and which has been exported.
Documents Required
The below following are the documents required for processing drawback claim.
S. The period between the date of clearance and the date when Percent of drawback
No. the goods are placed under Customs control for export
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4. 9-12 months 70%
a. Subject to such conditions and limitations as the Board may impose, an officer of customs
may exercise the powers and discharge the duties conferred or imposed on him under
this Act.
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b. An officer of customs may exercise the powers and discharge the duties conferred or
imposed under this Act on any other officer of customs who is subordinate to him.
c. Notwithstanding anything contained in this section, a Commissioner ( Appeals) shall not
exercise the powers and discharge the duties conferred or imposed on an officer of
customs other than those specified in Chapter XV and section 108.
6. Entrustment of functions of Board and customs officers on certain other officers. - The Central
Government may, by notification in the Official Gazette, entrust either conditionally or
unconditionally to any officer of the Central or the State Government or a local authority any
functions of the Board or any officer of customs under this Act.
Classes, Appointment of officers of Customs & Central Excise Officer under Indirect Tax Laws
1. Introduction
1.1. It is essential that officers working in various wings of Customs, Excise and Service tax
department remain aware of legal provisions relating to their appointment, powers and functions
under three main tax laws dealing with in-direct taxes, namely, Customs Act, 1962; Central Excise
Act, 1944 and the Finance Act, 1994.
1.2. In addition to exercising powers under three indirect tax statutes, they also derive powers
given to them under various other allied laws such as NDPS Act,1985; PITNDPS Act, Chemical
Weapons Convention Act,2000 etc. in which certain powers for specific purposes have been given
to our departmental officers for implementation in the field.
1.3. As the officers of our department have been given powers under various allied Acts, similarly
the officers of various other departments have also been empowered under Customs Act, 1962 to
exercise power of Custom officers subject to such limitation as have been specified in such
empowering notification.
1.4. Therefore, to understand the topic, it would be appropriate to divide this topic into three parts:
(a). Legal provisions (including notifications)providing for appointment, powers of officers of
Customs, Central Excise and Service Tax department under three indirect tax statutes:
(b). Powers given to the officers of other departments under the indirect tax statutes.
(c). Legal provisions under various other allied Acts empowering officers of Customs, Central
Excise and Service Tax department to exercise powers under these Acts.
Sec 100. Power to search suspected persons entering or leaving India, etc.—
(1) If the proper officer has reason to believe that any person to whom this section applies
has secreted about his person, any goods liable to confiscation or any documents relating
thereto, he may search that person.
(2) This section applies to the following persons, namely:—
(a) any person who has landed from or is about to board, or is on board any vessel within the
Indian customs waters;
(b) any person who has landed from or is about to board, or is on board a foreign-going
aircraft;
(c) any person who has got out of, or is about to get into, or is in, a vehicle, which has
arrived from, or is to proceed to any place outside India;
(d) any person not included in clauses (a), (b) or (c) who has entered or is about to leave
India;
(e) any person in a customs area.
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(c) manufactures of gold or diamonds;
(d) watches;
(e) any other class of goods which the Central Government may, by notification in the
Official Gazette, specify.
Sec 103. Power to screen or X-ray bodies of suspected persons for detecting secreted
goods.—
(1) Where the proper officer has reason to believe that any person referred to in sub-section
(2) of section 100 has any goods liable to confiscation secreted inside his body, he may
detain such person and produce him without unnecessary delay before the nearest magistrate.
(2) A magistrate before whom any person is brought under sub-section (1) shall, if he sees no
reasonable ground for believing that such person has any such goods secreted inside his
body, forthwith discharge such person.
(3) Where any such magistrate has reasonable ground for believing that such person has any
such goods secreted inside his body and the magistrate is satisfied that for the purpose of
discovering such goods it is necessary to have the body of such person screened or X-rayed,
he may make an order to that effect.
(4) Where a magistrate has made any order under sub-section (3), in relation to any person,
the proper officer shall, as soon as practicable, take such person before a radiologist
possessing qualifications recognized by the Central Government for the purpose of this
section, and such person shall allow the radiologist to screen or X-ray his body.
(5) A radiologist before whom any person is brought under sub-section (4) shall, after
screening or X-raying the body of such person, forward his report, together with any X-ray
pictures taken by him, to the magistrate without unnecessary delay.
(6) Where on receipt of a report from a radiologist under sub-section (5) or otherwise, the
magistrate is satisfied that any person has any goods liable to confiscation secreted inside his
body, he may direct that suitable action for bringing out such goods be taken on the advice
and under the supervision of a registered medical practitioner and such person shall be bound
to comply with such direction: Provided that in the case of a female no such action shall be
taken except on the advice and under the supervision of a female registered medical
practitioner.
(7) Where any person is brought before a magistrate under this section, such magistrate may
for the purpose of enforcing the provisions of this section order such person to be kept in
such custody and for such period as he may direct.
(8) Nothing in this section shall apply to any person referred to in sub-section (1), who
admits that goods liable to confiscation are secreted inside his body, and who voluntarily
submits himself for suitable action being taken for bringing out such goods. Explanation.—
For the purposes of this section, the expression ―registered medical practitioner‖ means any
person who holds a qualification granted by an authority specified in the Schedule to the
Indian Medical Degrees Act, 1916 (7 of 1916), or notified under section 3 of that Act, or by
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an authority specified in any of the Schedules to the Indian Medical Council Act, 1956 (102
of 1956).
SEZ UNITS
1. Special Economic Zone – Meaning
A special economic zone (SEZ) is a dedicated zone wherein businesses enjoy simpler tax and easier legal
compliances. SEZs are located within a country’s national borders. However, they are treated as a foreign
territory for tax purposes. This is why the supply from and to special economic zones have a little different
treatment than the regular supplies. In simple words, even when SEZs are located in the same country, they
are considered to be located in a foreign territory. SEZs are not considered as a part of India.
Based of this it can be clearly said that under GST, any supply to or by a Special Economic Zone developer
or Special Economic Zone unit is considered to be an Inter state supply and Integrated Goods and Service
tax (IGST) will be applicable .
Taking goods or services out of India from a special economic zone by any mode of
transport or
Supply of goods or services from one unit/developer in the SEZ to another unit in the
same SEZ or another SEZ.
Import means:
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Bringing goods or services into a special economic zone from a place located outside
India, by any mode of transport or
Receiving goods or services from one unit/developer in the SEZ by another
unit/developer located in the same SEZ or another SEZ.
Supply under bond or LUT without payment of IGST and claim credit of ITC; or
Supply on payment of IGST and claim refund of taxes paid.
When a SEZ supplies goods or services or both to any one, it will be considered to be a regular inter-state
supply and will attract IGST. The exception to this is, when a SEZ supplies goods or services or both to a
Domestic Tariff Area (DTA), this will be considered as an export to DTA (Which is exempt for the SEZ)
and customs duties and other Import duties will be payable by the person receiving these supplies in DTA.
FAQs
How is GST applicable in this case?
As stated earlier, the movement from an SEZ is considered to be an interstate movement. In this case, the
goods have moved out of the SEZ, though it is moved within the same state of Karnataka, it will be
considered as an Inter-state supply and IGST will be applicable on this supply.
Is EWB required to be generated? If yes, who is supposed to generate it?
Since the movement of goods from and to SEZ is considered as inter-state supply of goods and the value of
this supply is more than Rs. 50,000, EWB will have to be generated. XYZ is required to generate an EWB.
The transporter may choose to generate the EWB if XYZ does not generate it. Further, it is important to note
that, if XYZ is an unregistered dealer under GST, and ‘A’ is a registered dealer, ‘A’ will have to generate
the EWB.
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Facilities and Incentives
The incentives and facilities offered to the units in SEZs for attracting investments into
the SEZs, including foreign investment include:-
Exemption from customs/excise duties for development of SEZs for authorized operations
approved by the BOA.
Income Tax exemption on income derived from the business of development of the SEZ in a
block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. (Sunset Clause for
Developers has become effective from 01.04.2017)
Exemption from Minimum Alternate Tax (MAT) under Section 115 JB of the Income Tax
Act. (withdrawn w.e.f. 1.4.2012)
Exemption from Dividend Distribution Tax (DDT) under Section 115O of the Income Tax
Act. (withdrawn w.e.f. 1.6.2011)
Exemption from Central Sales Tax (CST).
Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).
A designated duty free enclave to be treated as a territory outside the customs territory of India for
the purpose of authorised operations in the SEZ;
No licence required for import;
Manufacturing or service activities allowed;
The Units are only required to achieve Positive Net Foreign Exchange to be calculated cumulatively
for a period of five years from the commencement of production;
Domestic sales subject to full customs duty and import policy in force;
Full freedom for subcontracting;
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No routine examination by customs authorities of export/import cargo;
SEZ Developers /Co-Developers and Units enjoy Direct Tax and Indirect Tax benefits as prescribed in
the SEZs Act, 2005.
To promote entrepreneurs to set up units in these Economic Zone, various attractive financial policies have
been established. These policies include promotional offers and simplicity in investing, taxation, trading,
quotas, customs and labor regulations. Moreover, units set up in these zones are offered special tax holidays.
The term special economic zone can further include:
As per the legal definition, A Special Economic Zone (SEZ) is a geographically bound zone where the
economic laws relating to export and import are more liberal as compared to other parts of the country.
Within SEZs, a unit may be set-up for the manufacture of goods and other activities including processing,
assembling, trading, repairing, reconditioning, making of gold/silver, platinum jewelry etc. SEZ units are
considered to be outside the customs territory of India. All supplies made to a unit operating in SEZ are
considered as Export out of India. Goods and services rendered from SEZ to normal territory is considered
as Import of such goods or services.
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